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WOSES OF WILLIAM KENT 

PITBUBHBD BT 

JOHN WILEY ft SONS, Inc. 



Bookkeeping and Cost Accounting for Fac- 
tories. 

vii +261 pages. 8Hbj lOH. Profusely illus- 
trated with forms. Cloth. $4.00 net. 

The Mechanical Engineers Pocket-Book. 

A Reference Book of Rules, Tables, Data, and 
Formulsp, for the Use of Engineers, Mechanics, 
and Students. Ninth edition. Thoroughly 
revised with the assistance of Robert T. Kent. 
ziv+1526 pages, 4 by 6|i. Flexible *'Fabrikoid" 
binding. $5.00 net. 

Steam-BoUer Economy 

A Treatise on the Theory and Practice of Fuel 
Economy in the Operation of Steam-Boilers. 
Second edition, 1915. xvii +717 pages, 6 by 0. 
287 figures. Cloth. $4.50 net. 

Investigating an Industry. 

A Scientific Diagnosis of the Diseases of Man- 
agement. With an introduction by Henry L. 
Gantt, author of *• Work, Wages and Profits." 
zl + 126 pages, 5 by 7^. Cloth, $1.00 net. 



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BOOKKEEPING 



AND 



COST ACCOUNTING 



FOR FACTORIES 



BY 

WILLIAM KENT, ME. Sc.D. 

GONSULTINO ENGINEER 

MEMBER AMERICAN SOCIETY OF MECHANICAL ENGINEERS; 
ASSOCIATE TAYLOR SOCIETY 



FIRST EDITION 



NEW YORK 

JOHN WILEY & SONS, Inc. 

London: CHAPMAN & HALL, Limited 
1918 



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Copyright, 1918 
Bt WILLIAM KENT 



I or 
■RAUNwoirrH A 00. 

BOOK MANUrAOtURfflS 
■ROOKLVN. N. Y. 



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PREFACE 



The author of this treatise was a bookkeeper and cost 
axjcountant for some years before he became an engineer, and 
many times during his career as an engineer and as manager 
of works he had occasion to install systems of bookkeeping 
and cost accounting and to audit books. In this way, and 
by reading much of the extensive hterature on accounting, he 
has kept in touch for over forty years with the development 
of accounting practice. More than twenty years ago he was 
urged by the president of one of the largest manufacturing 
corporations in New England to write a book on factory cost 
accounting, but he was then too busy with other matters 
and the suggested book had to be postponed to the indefinite 
future. Some three years ago the suggestion was repeated 
at a conference of several professional accountants, who 
agreed that the hterature on cost accounting was in a most 
chaotic shape and was altogether unsatisfactory. The author 
then began a serious re-study of the subject, by reading many 
of the most recent books, both English and American (there 
has been a large crop of them in the last ten years), and re- 
reading the articles on accounting that had appeared in 
Engineering Magazine and in the Transactions of the Amer- 
ican Society of Mechanical Engineers during the last twenty- 
five years, and by visiting many factories and conferring with 
their managers and cost accountants. The result of the 
study was to confirm the statement that the word "chaos" 
properly describes the bulk of the literature, the theories 
and opinions of most professional accountants, and cost 
accounting in most factories. There are many good books on 
bookkeeping and ordinary accounting, and some useful books 
on certain parts of the general subject of cost accounting, 
but there seems to be a lack of books covering a wide field 
and representing the best modem practice. The principal 
faults of the existing books may be listed as follows: 

1. Over-conservatism. Adherence to old-fashioned theories 
and fallacies. 

2. Over-development of red tape, leading to imnecessary 
clerical work. 

3. Too much variety and novelty of method. 

4. Vagueness and lack of detail in descriptive text. 

5. Incompleteness. Partial treatment of complex subjects. 
Accounting practice in factories, and that of professional 

accountants who are introducing their "systems" into 
factories, varies all the way from excellent to very poor. 
Some accoimtants are in advance of the books both in theory 
and in practice, but others are still perpetuating traditional 
errors. Some of them are still insisting that interest on in- 
vestment forms no part of factory cost; that business and 
selling expense are part of cost; and that a profit cannot arise 
until a thing is sold. Wrong methods of distributing burden 
are most common. The ratio of non-productive to pro- 
ductive labor is by many still considered to be an index of 



the efficiency of the manager. "Tying the costs to the 
general books" is erroneously supposed to prove the accuracy 
of the cost accounts. Inventories are priced and profits and 
losses are computed on the basis that the goods in the ware- 
house and stores are worth just what it cost to produce them, 
possibly many months earlier, although market values may 
have advanced or declined in the meantime. Inventories 
are inflated by charging to the cost of finished product the 
cost of keeping part of the factory idle. As one expert 
accountant of the modem school says: "It is astonish- 
ing how tenaciously the older school of accountants chng 
to the theory that whatever your expenditures are while 
making an article those expenditures constitute the cost of 
the article." 

The time has arrived when there is a need for a systematic 
treatise on cost accounting which will start the student at 
the beginning with the elementary principles of double entry 
bookkeeping and lead him through factory accounting to 
cost accounting, giving him not only the fundamental theory 
in accordance with the views of the ablest modem accountants, 
but also warning him against the time-wom fallacies of the 
older school. Such a treatise the author has undertaken to 
prepare. 

The first three chapters treat of elementary principles, 
titles and definitions of accounts, and the evolution from the 
ordinary journal and ledger systems into the labor-saving 
methods of separate purchase and sales ledgers, column 
cash books and journals, up to the monthly colunm ledger, 
and finally to the combined journal-ledger, by means of which 
the troublesome trial balance is dispensed with. The Fed- 
eral Trade Commission's system of accounts for retail mer- 
chants is then discussed, and it is shown how it can be im- 
proved by the use of the joumal-ledger. Incidentally the 
Conunission's views on Merchants' Selling Prices and Turn- 
over are criticised. 

Factory Accounting is then shown to be distinct from com- 
mercial bookkeeping, and the first principle stated is that in 
the general books of a manufacturing concem the operations 
of the factory should be treated as if they were those of a 
separate business, belonging to outside parties. Only two 
accounts need be kept with the factory, one for the investment 
in real estate and equipment, and the other, for the opera- 
tions of the factory, called Manufacturing or Factory Oper- 
ating account. This account is charged with all disburse- 
ments for factory operations, including purchases of material, 
payment of salaries, wages and expenses, together with 
monthly charges against the factory for its proportion of 
taxes, insurance, administration expense, interest on invest- 
ment, and reserve for depreciation. The account is credited 
with the "factory cost" or "warehouse value" of all goods 
shipped from the factory. 






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IV 



PREFACE 



In the factory books an account is opened with "Com- 
pany," or "Private Ledger," which is the reverse of Factory 
Operating account in the general ledger. It is credited with 
all charges made by the Company against the factory and 
charged with the value of the goods shipped. No account of 
selling expenses is kept in the factory books. 

When " Company " is credited with the values received 
from it, charges for the monthly total of these values are 
made to Factory Cash, Stores, Labor, and Burden, and in 
recording the factory operatioas these four accounts are 
credited and Work in Process, Worked Material, and Finished 
Product are debited. Numerous examples are given to show 
how these principles are worked out in practice. 

Cost Accounting is then taken up, and the author divorces 
the accounting department from the cost department, having 
the latter determine costs by an independent method. "A 
new definition of Factory Cost is now needed. It is not 
post-mortem cost, what the goods cost last year, but what it 
now costs to reproduce them or what they will probably cost 
during the remainder of the current year, assuming that the 
factory runs at its normal rate " (page 49). 

Various methods of cost finding are described, and the 
use of job tickets and stores-issue tickets is fully explained 
with examples. A long chapter is devoted to Distribution of 
Burden, and the errors of old methods are shown. The 
author considers the machine-hour rate as the basis of the best 
system for factories making " assembled " products, but 
shows how certain modifications of it may make the costs 
more accurate, and in the ''Last Word on Burden; Standard 
Burden per Unit of Product" (page 81), explains a system by 
means of which the clerical labor of cost finding may be 
greatly lessened. 

Other chapters treat of Depreciation, Inventory Valuation, 
Appraisals, "Sj'stems" and "Red Tape," Daily and Monthly 
Records, Charting of Statistics, Cost of Idleness, Problems 
and Difficulties, Uses of Costs, Various Opinions about Costs, 
Classification, S3rmbols, Bookkeeping by Machinery. These, 
with the introductory chapters take up about one-half of the 
book. The remainder is devoted to practical cost accounting 



in various industries, including a blast furnace, a steel works, 
foundries, a hardware factory, a machine shop, a bakery, a 
textile mill, a woodworking shop, cost and price of coal, 
power plants, and printing shops. The final chapter contains 
examples of reports to stockholders of large corporations, 
numerous blank forms in addition to those given in other 
chapters, and a list of books on cost accounting and on scien- 
tific management. 

The author here wishes to acknowledge his indebtedness to 
the many officers of corporations, accountants and others who 
have assisted him in his labors by allowing him to study their 
cost accounting methods. He is under especial obligations for 
courtesies extended by the following: Plimpton Press, Nor- 
wood, Mass.; New England Butt Co., Providence, R. I.; 
Yale & Towne Mfg. Co., Stamford, Conn.; Nash Engineer- 
ing Co., South Norwalk, Conn.; Federal Printing Co., New 
York; National Meter Co., Brooklyn, N. Y.; Tabor Mfg. Co., 
Miller Ixx^k Co., and Henry Disston & Sons, Philadelphia, 
Pa.; Ferracute Machine Co., Bridgeton, N. J.; H. H. Franklin 
Mfg. Co., Syracuse, N. Y.; I^odge & Shipley Co., and The 
Lunkenheimer Mfg. Co., Cincinnati, 0. ; and The Joseph & 
Feiss Co., Cleveland, 0. He is indebted also to Mr. Gershom 
Smith, Manager of the Tabulating Machine Co., New York, 
and to Mr. Albert Walton, manufacturing accountant and 
industrial engineer, Philadelphia, who have kindly contrib- 
uted matter which will be found under their names in the text. 

Attention is called to some unusual features of the book, 
designed to make it convenient for readers and students, 
viz., the size of the page, 8J by 11 inches, double column, with 
two sizes of type, to facilitate reading and to give space for 
large forms and tables without using folders; the use of the 
wax process instead of photographic methods of reproducing 
forms; the substitution In the forms of clear lower case type 
for capitals and block letters which are often difficult to read; 
the very complete table of contents and index with occasional 
use of full-face type to call attention to the most important 
subjects; the index to forms and to names of authorities 
quoted; and the use of easily read figures in the tables, with 
diagonal lines for the fractions in all 6-point type. 



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CHAPTER I. BOOKKEEPING 
Elementary Principles 

PAOB 

The Ledger. The Cash Book 1 

Labor-saving Methods 2 

Payment of Bills 2 

Single and Double Entry 2 

The Journal ! 3 

Rules for Journalizing 3 

Loss and Gain Accounts 4 

Invoice Book. Invoice Ledger 4 

Sales Ledger 4 

Trial Balance 4 

The Bookkeeper, the Accountant, and 

the Engineer 5 

Relation between the Accountant and 

the Efficiency Engineer 5 

CHAPTER 11. TITLES AND 
DEFINITIONS OF ACCOUNTS 

Stock, Partner's Account 6 

Capital Stock 6 

Profit and Loss 6 

Surplus; Dividend 6 

Merchandise 6 

Trading, Purchase Acct., Sales Acct. 7 

Mdse. Returned; Sales Allowances. 7 

Accounts Receivable and Payable 8 

Bills (or Notes) Receivable 9 

Bills (or Notes) Payable 9 

Bill Book 9 

Balancing Bills Receivable and Pay- 



able. 

Interest Account 

Suspense Account 

Property Accounts 

Balancing Property Accounts 

Investment^ in Bonds and Stocks . . . 
Mortgage or Bonded Indebtedness . . 

Expense Accounts 

Advance Payments; Accrued Ex- 



Insurance Account; Taxes 

Consignment Accounts 

Commission Business 

Account Current; Account Sales 

Classification of Accounts 

Accounting Code 

Capital, Capital Stock, Definitions . . 



CHAPTER III. THE EVOLU- 
TION OF BOOKKEEPING — 
THE COLUMN LEDGER 

Journalizing and Posting 13 

Discount Column in Cash Book 14 

Accounts Receivable and Payable. . . 14 



CONTENTS 

PAoa 

The Column Cash Book 15 

The Invoice Register 15 

The BUI Book 15 

The Eight-column Journal 15 

The Safeguard Ledger 16 

The Column Ledger 17 

Combined Journal-ledger 17 

Monthly Column Ledger 19 

Balance Sheet 20 

Notes on the Journal-ledger 20 

Check on Journal-ledger 21 

CHAPTER IV. ACCOUNTS FOR 
RETAIL MERCHANTS. SELL- 
ING PRICES. TURNOVER 

The Federal Trade Commission's 

System 22 

System of Accounts for Retail Mer- 
chants 22 

Monthly Summary of Business 22 

Explanation of the Accoimts 23 

Balance Sheet 23 

Profit and Loss Statement 24 

Journal and Ledger Entries 25 

Balance Sheet 27 

Suggested Improvements in System . 28 

Reducing the Number of Accounts . . 28 

Reserves; Depreciation; Surplus 30 

Profit and Loss Adjustment 30 

Monthly Expense Ledger; Column 

Ledger 31 

The Condensed Accounting System. . 32 

Expense Distribution 32 

Deferred Profit and Loss Items 32 

Merchants' Selling Prices 33 

Factory Cost and SeUing Price 33 

Formulas for Profit and Loss 33 

Distribution of Burden 34 

Turnover 34 

Turnover of Goods and of Capital. . . 34 

CHAPTER V. FACTORY AC- 
COUNTING 

Separation of Factory from General 

Books 35 

Products, Continuous, Single, Varied 35 

Recorded Costs 35 

Normal Costs 36 

Different Kinds of Industries 36 

Company or Private Ledger 36 

Subdivision of Total Expenditures. . . 36 

Inter-departmental Accounts 36 

The Factory Books 36 

Opening a Set of Factory Books 37 

Journal and Ledger Entries 38 

▼ 



i PAon 

Trial Balance and Monthly State- 

ment 39 

Accounting Code 39 

Transfer and Balancing Entries 39 

Company's General Ledger 40 

Factory General Ledger 41 

A Simple Accounting System 42 

Journal and Ledger Entries 42 

Inventory 43 

Adjustments. Auditor's Report .... 44 

Code of the Cost Accountant 45 

Company Ledger; Factory Ledger . . 45 

Burden Account 46 

Statistical Sheet, Mfg. Accounts 46 

The Auditor's Comments 46 

Depreciation Reserve 47 

Expense Assets 47 

Suspense Account 48 

Contingent LiabiHty 48 

Dividend and Surplus 48 

Error of Uniform Overhead 48 

CHAPTER VI. COST ACCOUNT- 
ING 

Factory Cost Definition 49 

Divorce Accounting from Cost 49 

Starting a Cost System 50 

The Stores System 60 

Labor Charges 50 

Factory Orders 60 

Standing Orders, Office Orders 50 

Production Orders, Job Orders, Small 

Orders 60 

Subdivisions of Pay RoU 51 

Time Keeping 51 

Stores Account 51 

Petty Stores 61 

Transactions and Journal Entries. . . 62 

Valuation of Stores 62 

Profit Due to Increase in Value 62 

Inventory of Warehouse and Stores. . 63 

Inventory of Partly Finished Work. . 63 

Checking the Continuous Inventory. 63 

Cost Keeping by Pieces of Paper 64 

Balance of Stores 64 

Production Orders 64 

Job Tickets 64 

Monthly Statements of Bills 64 

Voucher Checks 64 

Check Register 64 

Requisitions 65 

Stores Credit Card 56 

Burden Distribution Book 65 

Cost Card, Finished Product 66 

Cards for Production and for Cost 

Keeping 65 

Limitation of the Cost Accountant. 66 



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VI 



CONTENTS 



CHAPTER VII. COST FINDING 
METHODS. USE OF THE JOB 
TICKET 

PAGE 

Time and Job Tickets 57 

Weekly Pay Voucher 58 

Bonus Figuring 58 

Workman's Yearly Record 59 

Effect of Bonus on Profits 59 

Examples in Use of Job Tickets 59 

Problem in Cost Finding 60 

Clerical Work on Tickete 60 

Information on the Job Ticket 61 

Storekeeper's and Burden Records.. 61 

Office Orders 61 

Operation Order or Job Ticket 61 

Definition of " Job " 62 

Piece Cost Card 62 

Comparison of Burden Rates 63 

A Complete Job Ticket 63 

Sorting of Tickets 64 

CHAPTER VIII. DISTRIBUTION 
OF BURDEN 

Yearly Burden Expenditure 65 

Percentage on Direct Labor 65 

Man-hour Method 65 

Variable Factors of Burden 66 

Department Method 66 

Class-of-Product Method 67 

Comparison of Different Methods. . . 67 
Calculation of Machine-shop Burden 

67,68 

Modification of Machine-rate Burden 69 

The Job Burden Rate 69 

Burden Table 70 

Burden in Minor Departments 70 

Blacksmith and Carpenter Shops 70 

Foundry 71 

Polishing and Plating Rooms 71 

Grinding Room 72 

Figuring Burden on Three Machines . 72 

Departmental and Class Burdens . . 73, 74 

Total Burden 74 

Total Labor and Burden Costs 74 

Use of Normal Burden Figures 75 

Keeping Labor and Material Cost 

without Burden 76 

Classification of Exp)enditures by Per- 
centages 76 

Ratio of Non-productive to Produc- 
tive Labor 77 

A Problem in Burden Charging 77 

Another Problem 78 

The Supplementary Rate 78 

Application of the Supplementary 

Rate 79 

A Common Fallacy 80 

A False Theory 80 

The Correct Theory 81 

The Last Word on Burden. Standard 

Burden per Unit of Product 81 

Saving of Clerical Work 82 

Factory Cost and Warehouse Value. . 83 



PAQB 

Interpretation of the Recorded Cost 

Figures 84 

Advantage of the Standard Schedule . 84 
Charge Unabsorbed Overhead to the 

Sales Department 84 

CHAPTER IX. DEPRECIATION. 
INVENTORY VALUATION. 
APPRAISALS 
Method of Treating Repairs and De- 
preciation 85 

Depreciation, Theoretical and Actual 86 
Relation of Depreciation to General 

Expense 86 

Four Methods of Treating Deprecia- 
tion 86 

Depreciation Table 87 

Valuation of Machinery 87 

Table, Depreciation at Different Rates 88 
Relation between Perpetual-Inven- 
tory Valuation and Appraised Valu- 
ation 89 

Table, Standard Depreciation Rates . 90 

Appraisals for Insurance Purposes. . 91 

Appraisals of Manufacturing Property 9 1 

CHAPTER X. SYSTEMS AND 

RED TAPE. FUNDAMENTALS 

OF A COST SYSTEM 

Use of Red Tape 92 

The System-mad Manager 92 

Cost Systems in Government Shops. 92 

The Card System 93 

Cost Accounting at the Brooklyn 

Navy Yard 94 

A Better System 94 

Federal Trade Commission's Cost 

System 94 

Functions of a Cost System 95 

Balance Sheet 96 

Commercial and Factory Ledger 97 

Condensed Factory Ledger 98 

Distribution of Overhead 98 

CHAPTER XI. DAILY AND 

MONTHLY RECORDS. 

CHARTING OF STATISTICS. 

COST OF IDLENESS 

Daily Record of Work in Progress. . . 99 

Monthly Comparative Cost Record. . 100 

Perpetual Inventory 100 

Monthly Report of Product 100 

Weekly Labor Report 100 

Weekly and Monthly Cost Periods . 100 

Memoranda for Journal Entries 101 

Journal-Ledger 101 

Monthly Record of Progress 102 

Tabulating Monthly Ledger Totals.. 103 

The Charting of Costs 103 

The Exception Principle 103 

Diagram of the Accounting System . . 103 

Diagram of Annual Exhibit 104 

Idleness Charts 105 



PAGB 

Chart of Iron Works Costs 106 

Cost of Pig Iron 107 

Chart of Reduction of Labor Costs. . 107 

CHAPTER XII. PROBLEMS AND 
DIFFICULTIES. STANDARD 
COST 

Costs when the By-product from One 

Article is used in Making Another 108 

Cost of Making Disks from Scrap . . . 108 

Factory Costs, Recorded and Normal 109 

Fixing the Value of Scrap 109 

The Cost of Silver 110 

How to Reduce Costs Ill 

Predetermination of Costs Ill 

Standard Costs Ill 

Cost Formulas Ill 

Causes of High Cost in Government 

Arsenals 112 

Reducing the Cost of the Cost System 112 

Problem, the Cost of Locks 112 

Time-keeping Systems 113 

Piece Cost Cards 113 

Investigating the Cost System 114 

Modifying the Cost System 115 

Problem, Cost of Engines and Tur- 
bines 115 

Three Years' Statistics 116 

Figuring Profits and Losses 117 

The Books do not Tell the Whole 

Story 118 

Scientific Management 119 

CHAPTER XIII. USES OF COSTS. 
VARIOUS OPINIONS ABOUT 
COSTS 
Conclusions to be Drawn from Cost 

Statistics 120 

Uses of a Cost System 120 

Definition of Factory Cost 121 

Objects of Cost Keeping 121 

Controlling Accounts 121 

Theories of Costs 122 

Interpret the Figures into Actions .. . 122 

Functions of the Cost Accountant . . 122 

The Manager of the Future 122 

Devising a Cost System 123 

Part of the Cost Sjrstem may be 

Dropped 123 

T3ring the Cost System to the Gen- 
eral Accounts 124 

Wage Systems. The Bonus Plan 124 

The Flow of Values 124 

Predetermined Costs. Standard 

Costs 126 

Bad Cost Systems 126 

Axioms Concerning Costs 127 

Subdivisions of Cost 127 

Cost of Organization, of Patents, etc. 128 

Interest Charged to Cost 128 

Inflated Inventories 128 

The Rate of Interest 128 

Problems in Charging of Interest. . . 128 



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CONTENTS 



vu 



CHAPTER XIV. CLASSIFICA- 
TION. SYMBOLS. BOOK- 
KEEPING BY MACHINERY 

PAOB 

Classification. Symbols 131 

Letter Ssrmbols versus Numbers 132 

List of Operation Symbols 132 

Nomenclature of Machine Details. . . 132 

Record of Equipment 133 

Method of Indexing and Filing 134 

Plant Inventory 134 

Bookkeeping Machines 135 

List of Makers of Machines 135 

The Hollerith Tabulating System.. 135 

Samples of Tabulating Cards 137 

Elapsed Time Recording Machine . . . 138 

The Periodograph 138 

Monroe Calculating Machine 138 

Marchant Calculator 139 



CHAPTER XV. OLD-SCHOOL 
ACCOUNTING IRON WORKS 
BOOKKEEPING 

Bookkeeping at a Pennsylvania Fur- 
nace 140 

Ledger Accounts at a Blast Furnace. 141 

Sample of Cash Book 141 

Weekly Report of a Furnace 141 

Labor Book 142 

Bookkeeping at a New Jersey Furnace 143 

Journal Entries 143 

Cost of Pig Iron 145 

Statistical Statement 146 

A Better Method 146 

Iron Works Ledger, New Form 147 

Combined Journal Ledger 148 

Cost of Iron when By-products are 

Made 149 

Example of Tying Costs to Books . . . 149 

Cost Keeping in a Rolling Mill 150 

Machine>bour Rates in a Steel Works 150 

CHAPTER XVI. MODERN AC- 
COUNTING SYSTEMS FOR 
STEEL WORKS 

A Steel Work's Accounts 151 

List of Ledger Accounts 152 

Description of Accounts 152-162 

Trial Balance, Balance Sheet 163 

Income Statement 163 

Fonns used by Mr. Walton 164-169 

Penna. Steel Co. Ledger Accounts. . . 170 

CHAPTER XVII. FOUNDRY 
COSTS— COST OF COAL 

Cost Finding in an Iron Foundry 171 

Variable Conditions in a Foundry . . , 171 
Cost Finding in Brass, Bronze, and 

Aluminum Foundries 172 

Iron Foundry Cost Sheets 173 



PAGE 

Estimating 174 

A Cost Statement 174 

Forms and Routine 175-178 

Caution in Regard to Use of Forms. . 178 

Cost and Price of Coal 178 

Cost of a Ton of Anthracite Coal 179 

CHAPTER XVIII. HARDWARE 
FACTORY AND MACHINE 
SHOP ACCOUNTING 

Accounting System in a Hardware 

Factory 180 

Productive Classes and Departments. 180 

Accounting Symbols 180 

Stores Records 180 

Time Keeping, Verification of Pay 

Roll 181 

The Tabulating Machine Record 182 

Statistical Sheets, Pay Roll Distri- 
bution 182 

Accounting Distribution of Pay 

Roll 183 

Journal Entries 184 

Works Ledger 184 

Residuum Expense 185 

Determination of Costs 185 

Recorded Cost (Shop Cost) 186 

Cost of Finished Product 186 

Part Cost Card 186 

Present Cost Estimate . . .-. 186 

Overhead Percentage 186 

Slippage 186 

Unit Costs of Product 187 

Original and Revised Costs 187 

Estimates on Special Work 188 

Annual Inventory 188 

Statistical Reports 188 

Labor Turnover 188 

Monthly Estimate of Increase of 

Inventory and Profit or Loss 189 

Various Forms 191 

A Machine-shop's Cost System 192 

Incentive for Cost Department 192 

Fundamental Principles 192 

Wages Record. Time Cards 192 

Relative Cost Factor or Cost Num- 
ber 193 

Shop Expense Rate 194 

Cost Collecting Cards 194 

Expense Distribution Sheet 194, 199 

General Business Expense 194 

Stores 194 

Work of the Bookkeeper 195 

Worked Materials in Process 196 

Various Forms 197-201 

General Ledger Balance Sheet 198 

Proof of the Cost System 198 

Criticism of the System 198 

Distribution of General Business and 

Shop Expense 200 

Shop Expense Rate 201 

Sources of Error 202 



CHAPTER XIX. COSTS IN A 
WOODWORKING SHOP; A 
BAKERY; A TEXTILE MILL; 
A POWER PLANT 

PAOB 

Woodworking Shop, Time Study 203 

Statistical Records and Charts 204 

Burden Distribution 204 

Cost Estimate 205 

Planning and Scheduling Work 205 

Use of the System in Other Businesses 206 

Cost Accounts for a Bakery 206 

Textile Cost Accounting 206 

Cost Estimates and Cost Records . . . 206 

Lot Costs; Operation Costs 207 

Power Plant Operating Costs 208 

Classification of Expenses 208 

Comparative Cost of Operation and 

Maintenance 209 

Standard Costs 210 

Curves of Standard Costs 210 

Standardization of Protective Charges 211 
Comparison of Costs and Efficiencies 211 

CHAPTER XX. COSTS IN A 
PRINTING SHOP 

Subdivision of Labor 213 

Apportioning Expense to Depart- 
ments 213 

Plimpton Press 214 

A Standard Cost System for Printers 216 

S3rnop6is of Forms 217 

Statement of Cost of Production .... 218 
Chargeable and Non-changeable 

Hours 218 

Monotype Cost Records 220-222 

Titles and Definitions of Accounts. . . 223 

Federal Printing Co 224 

Forms Used 224-236 

CHAPTER XXI. REPORTS TO 
STOCKHOLDERS; EDUCA- 
TION OF ACCOUNTANTS; 
COST OF IDLENESS; MISCEL- 
LANEOUS FORMS; BIBLIOG- 
RAPHY. 

Reports to Stockholders of Corpora- 
tions 237 

Surplus Earns Dividends 237 

Bell Telephone System 237 

General Electric Co 238 

Westinghouse Electric & Mfg. Co. . . 239 

College Education in Accounting 240 

Technical Experience Necessary 241 

An English View 241 

Expense of Idleness 241 

Miscellaneous Blank Forms 243-250 

Books on Cost Accounting 251 

Books on Industrial Engineering. . . . 252 

Topical Index 255 

Index of Forms and Blanks 259 

Index of Authorities Quoted 261 



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BOOKKEEPING AND COST ACCOUNTING FOR FACTORIES 



CHAPTER I 
BOOKKEEPING 



ELEMENTARY PRINCIPLES 



Bookkeeping is a systematic method of keeping accounts 
of business transactions. 

Accounts are personal or non-personal: 

A personal account is a record of the transactions of a 
business with a particular person, firm or corporation. 

A non-personal account, sometimes called a " representa- 
tive account,'' is one kept with things dealt in, such as Cash, 
and Merchandise, or Bills Receivable, and with expenditures 
for or receipts from other things than purchases and sales of the 
goods dealt in, for example, Expense Account ; Interest Account. 

The Ledger. An account is usually kept in a Ledger. 
The name of the account is written at the top of the page. 
In the ordinary form of ledger the page is divided into two 
sides, left and right hand, called the Debtor and Creditor 
(or Debit and Credit) sides, and is ruled as shown below: 



Dr. 



John Jones 



Ct. 



1916 










1 








Feb. 1 


To Md«»e. 


^\ 


17 


10 


Feb. 15 


By Cash 


n 


26 35 


3 




25| 


9 


25 








1 



The meaning of these entries is that John Jones purchased 
merchandise on Feb. 1, $17.10 and on Feb. 3, $9.25, the 
details of the sale, corresponding with the bills or sales- 
tickets made at the time of the sale, being recorded on pages 
24 and 25 of some other book, such as a Sales Book or Day 
Book, and that he paid the account on Feb. 15, as recorded 
on page 11 of a Cash Book. The words " To " and " By " 
are used as a matter of custom on the debit and credit sides 
respectively, but they are often omitted. 

In this system of bookkeeping there are at least three 
books involved, two hooks of original entry, the Sales Book 
and the Cash Book, and a third book, the Ledger, into which 
entries are transferred or " posted " from the other books. 
In some lines of business, such as that of a country store, 
the Ledger may be a book of original entry, and it may be 
ruled as follows: 



1916 



John Jones 



Feb. 1 



Feb. 3 



10 beef. 20 

30 pork. 20 

25 sugar. 7 
6 ds. eggs, 25 
2 lb. coffee, 30 
1 bbl. flour 



I pe.. dress gds. 
I pr. boots 



Paid Feb. 15 



2 


00 








i 




6 

1 
I 


00 
75 
50 
60 












5 


25 












17 

4 


10 












00 


5 


25 












9 


25 


26 


35 








J 





In this ledger all the columns are debit colunms, and there 
may be three or more money colmnns, depending on the size 
of the page. 

The Card Ledger. The ledger may be kept on cards, 
which are filed alphabetically in a drawer, instead of in a 
book. 

The Bill Files. The ledger and the sales book may even 
be dispensed with altogether. If a bill is delivered to John 
Jones each time he makes a purchase, a carbon copy of the 
bill may be put in a folder or envelope marked with his 
name, and kept in a filing case or drawer of Unpiaid Bills 
in which the folders are arranged alphabetically. If bills 
are rendered monthly, a sales memorandum or sales ticket 
for each sale is similarly filed, and at or near the end of the 
month all the John Jones tickets are taken out of the folder 
and a type-written bill and a carbon duplicate are made from 
them, the duplicate being placed in the unpaid bill file while 
the original is sent to Jones. 

Originals should be kept. The original sales tickets, or 
the carbon copies of the original bills delivered with the 
several sales, should be filed carefully and preserved for two 
years as a precaution in case any dispute should arise about 
the account. 

When Jones pays his bill or bUls, the duplicates are taken 
out of the unpaid bill file, marked paid and placed in the 
file of paid bills. The amount of cash received is entered 
in the cash book, which may be of any shape and ruling 
suitable to the kind and extent of the business, the following 
being the common form: 

The Cash Book 



Dr. Cash 








Cash Cr. 






1916 
















Feb. 13 


To Balance, forward 


317 


96 


Feb. 13 


By Expense, Clerk 






14 


To Wm. Smith on 








hire 


24 


17 




acct. 


50 


00 


14 


By Mdse (Thom- 






15 


To John Jones in full 


26 


35 




son's bill) 


15 


00 






— 


— 


15 


By W. Robinson ft 










394 


31 




Sons 

By Balanoe 


217 
137 

394 


24 
90 

3! 


Feb. 16 


To Balance 


137 


90 











The receipts and payments of cash are usually kept on 
opposite pages of the book, the Dr. side (receipts) always 
being the left-hand page and the Cr. (payments) the right- 
hand page; corresponding to the Dr. and Cr. side of a 
ledger page. The entry " By Balance, 137.90" on the Cr. 
side is usually made in red ink. 



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Labor-saving Methods. The difference between modem 
bookkeeping systems and old-fashioned ones is not in the 
principles, which are as unchangeable as those of arithmetic, 
but in the use of labor-saving methods, such as card ledgers, 
bill files, and other "short cuts." 

An example in labor saving is shown in the modem way of 
paying bills by checks sent by mail. Fifty years ago Jones 
would have written a letter in copying ink reading as follows: 

New York, Feb. 14, 1866. 
Messrs. Thomas Brown & Sons, 
230 Washington St., 
City. 

Gentlemen: 

I beg to enclose my check No. 1234 on the Bank of North America 
for S26.35 in payment of your invoices of 1st and 3d inst. Kindly 
acknowledge receipt. 

Yours respectfully, 

John Jones. 

He would make a press copy of this letter in a letter book, 
make a note of it in the index, and enclose it in an addressed 
envelope. On receiving the letter Thomas Brown & Sons 
would mail John Jones a formal receipt together, possibly, 
with a courteous letter of thanks, using time, paper, ink and 
postage stamps. 

In the year 1916 he would receive his monthly bill in a 
"window" envelope, his name and address being printed by 
an addressograph on a perforated coupon attached to the 
bill, which is folded so that the name and address show 
through the transparent paper in the "window." Here is 
one style of coupon : 



SPECIAL NOTICE 

IF THIS BILL IS PAID BY CHECK AND NO FURTHER RECEIPT 

REQUIRED PLEASE DETACH THIS COUPON AND MAIL WITH 

CHECK 

Folio 1794 Date Feb 1, 1916 

Name Mrs. John Jones 

Address Montclair N. J. Amount 21.09 

James McCreery & Co., 5 W. 34th St. N. Y. 

When a concern pays a bill it is no longer customary to 
send a letter with the check, requesting that a receipt be 
returned. The check is merely enclosed with a printed coupon 
attached to it, something like the following: 



The coupon may be dispensed with, and instead there is 
printed on the back of the check, at the top: 

In Payment of Account as per Statement of 191 . . 

In some places the labor of making and mailing monthly 
checks is still further shortened. The customer makes a list 
of all his monthly bills, giving names and addresses of the 
creditors, and sends to his local bank a single check for the 
total amount. The bank lumps together all the amounts 
due to each creditor, and sends each a cashier's check (or a 
credit memorandum if the creditor is a depositor in the same 
bank) for the total amount due him, thus acting as a clearing 
house between debtors and creditors. 

Single-entry Bookkeeping. The system of accounts 
described above is called single entry. Personal accounts 
only are kept in the ledger, and there is only one entrj^ for 
each transaction. We " charge " or " debit " John Jones's 
account when he makes a purchase and credit it when he pays 
his account. A creditor, one from whom we purchase goods, 
is credited when we receive his bill or statement of account, 
and charged* or debited when we pay him. The system is 
rarely used by any except very small business concerns, 
because it does not give all the information that the owner 
wishes to know about his business, such as the amount of 
merchandise bought or sold during any given period, the 
amount of bills or notes receivable or payable received, issued 
or outstanding, and the amount of expenses. 

Double Entry. In double-entry bookkeeping, which is 
in almost universal use, ledger accounts are kept not only 
with persons, firms and corporations, but with things, such 
as cash, merchandise, bills payable, bills receivable, and with 
interest, discount and expenses of various kinds, also with 
the owner for his investment or net assets; and there is a 
profit and loss account to show gains or losses. The chief 
principle of double-entry bookkeeping is that for every 
transaction an entry is made to two or more accounts, and 
that the entry or entries made on the debit side of the ledger 
must for every transaction be equal in amount to the entry 
or entries made on the credit side. The ledger thus is always 
"in balance," provided all the posting from the journal and 
other books has been done and no errors have been made; 
that is, the sum of all the entries on the debit sides of all 
the accounts equals the sum of all the entries on the credit 
sides. The " balances " or differences between the debit 
and credit sides of the several accounts, when listed and 
summed up in a " trial balance," will also be in balance; 
that is, the sum of the debit balances will equal the sum of 



The above check ib in payment of account as shown below. Tear off at perforation before using at bank. 
No receipt or acknowledgment is necessary. If unsatisfactory return all papers for adjustment. 












Date 


Our No. 


Details of Payment Made by This Re- 
mittance from Company 


Amount 
of Charge 


Discount 


Less 
Freight 


Other 
Deductions 


Net 


11 


2 


53191 


Balance of Account 






1 

i 










516 


67 



Detach this statement before depositing check. 



i 



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the credit balances if the " posting ** has been done cor- 
rectly. 

The John Jones transactions shown on page 1 in single 
entry will appear as follows in a double-entry ledger: 

(Page 26) 

Dr. Merchandise Cr. 



I Feb. 1 

I 3 



By John Jonea 
By John Jonea 



(Page 6) 
Dr. 



Cash 



Cr. 



Feb 15 



To John Jonea 



(Page 130) 
Dr. 



ml 26 35|l 

h . .1 

John Jones 



Cr. 



Feb. I To Mdse. 
Feb. 3 i To Mdse. 



17 I0| Feb. 13 By Cash 

925;i I 



26 



35 



In order to save time and ink when there are hundreds or 
thousands of personal accounts, the expressions " To Mdse " 
and " By Cash " are often omitted. 

The Journal. In the above entries the credits to merchan- 
dise account and the two charges to John Jones were posted 
from the Sales Book, and the debit of Cash and the credit of 
John Jones were posted from the Cash Book, but it is cus- 
tomary in double-entry bookkeeping to have another book 
called the Journal, which may be a book of original entry 
containing either all of the transactions of a business or only 
those which are not entered in the sales book, cash book or 
other book, or it may be an intermediate book between the 
books of original entry and the ledger, in which transactions 
are summarized or grouped, in order to avoid crowding the 
ledger with unnecessary detail. When all the transactions 
are entered in the Journal it is sometimes called the Day Book 
or Blotter. Entries in a Journal are always made in " journal 
form," that is, in Debtor and Creditor style, but in a Day 
Book they may be made in ordinary language, as below: 



DAT BOOK 

Tuesday, February I, 1916 
Sold John Jones (here insert items) 

Thursday, February 4, 1916 
Sold John Jones (items) 

Tuesday February 15, 1916 
John Jones paid his account 



17 



26 



10 
25 
35 



(Page 24) 


JOURNAL 

Tuesday, February 1. 1916 


Dr. 




Cr 




130 
20 


John Jones Dr. 

To Mdse. 


17 


10 


! »7 

i 

9 


10 


(Page 25) 


Thursday February 3, 1916 




130 


John Jones Dr , 


9 


25 




20 


To Mdse. 


25 


(Page 32) 


Tuesday February 15, 1916 










6 
130 


Cash Dr. 

To John Jones 


26 


35 


26 


35 



These entries are posted in the ledger as already shown. 
As each journal entry is '^ posted " a figure showing the 
page of the ledger on which the account appears is entered 
in the first column of the journal. 

In actual bookkeeping the expression " Dr." and " To " 
in the above entries and Dr. and Cr. at the tops of the columns 
are generally omitted. 

Except in small businesses it is not customary to make a 
journal entry of each separate transaction, as above shown, 
but once a month to make group entries of transactions of a 
similar kind, the original entries of which are made in other 
books, as below: 

Febu29 





Sundries 












To Mdse 


26 


35 




y 


130 


John Jones 




175 


Wm. Smith 


46 


17 






161 


Thos. Robertson 

X. The sum of all the charges to individual 
accounts is entered here as a credit to 


93 


20 








Merchandise account. 












Cash To Sundries 


X 








130 


To John Jones 






26 


35 


175 


To Wm. Smith 






30 


00 


161 


To Thos. Robertson 
X. Enter here the sum of all the cash receipts 
which are credited to individuals 






85 


10 



The word "Sundries" means the "several accounts 
stated below." 

In the actual practice of large concerns both of the above 
entries would be omitted from the journal, on account of 
their involving an unnecessary amount of labor. The 
charges to Jones and others would be entered directly 
from the sales book and the credit to Mdse. would be the 
total of the monthly entries in the sales book. So also 
the receipts of cash would be entered to the credit of indi- 
vidual accounts directly from the cash book, and the debit 
to Cash account would be the total cash receipts of the 
month. 

Rules for Journalizing. Certain rules for making entries 
in journal form, whether they are made in the journal or in 
books of original entry such as the cash book or the sales 
book, are memorized by bookkeepers, and their careful ob- 
servance is essential for correct work. Such rules are as fol- 
lows: 

Rule 1. When a thing is received and a thing is given 
for it at the time, the thing received is Dr. to the thing 
given. 

Rule 2. When a thing is received and nothing is given for 
it at the time the thing received is Dr. to the party from whom 
it was obtained. 

Rule 3. When a thing is given and nothing is received for 
it at the time, the party to whom it is given is Dr. to the 
thing given. 

General Rule. The account that receives value is Dr. to 
the account that gives or parts with value. 



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Examples 
Transactions 
Rule 1. We buy Mdse. and pay Cash 
We sell Mdse. and receive a 
note. 
Rule 2. We receive Cash from John 
Jones. 
We buy Mdse. on time from 
Peter James. 
Rule 3. We sell Mdse. to John Jones 
on time. 
We pay Cash to Peter 
James. 



Entries 
Mdse. Dr. to Cash. 
Bills Receivable to 

Mdse. 
Cash Dr. to John Jones 

Mdse. Dr. to Peter 

James. 
John Jones Dr. to 

Mdse. 
Peter James Dr. to 

Cash. 



Loss and Gain Accounts. While these rules are sufficient 
for most business transactions, such as purchases and sales, 
payments of cash or issue of notes for merchandise, or to 
settle open accounts and the like, they are scarcely sufficient 
without the use of some sort of bookkeeping fiction for other 
. kinds of transactions, such as the payment of taxes, clerk 
hire, interest on borrowed money, the receipt of allowance 
for defective goods, or for changes in the value of accounts, 
such as may be caused by appreciation or depreciation of 
property, bankruptcy of debtors or other causes. To cover 
these cases we have another general rule to be memorized: 

Loss and Gain Account 
Debit for Losses Credit for Gains 

Loss and Gain Account, or Profit and Loss Account as it is 
commonly called, is an account that represents all changes 
in the net assets of a concern that are due to gains or losses 
of any kind. Such changes are not always entered at the 
time they occur. An appreciation in the value of land or the 
depreciation in the value of a building or of machinery or 
goods may not appear in the books until the proprietor of 
the business finds it convenient or advisable to make the 
entry. 

Discount, Interest, Taxes, Insurance, Commissions, Adver- 
tising, Clerk Hire, Freight and Cartage, Fuel, Light, Depre- 
ciation and similar expense accounts are branches or sub- 
sidiaries of the general Profit and Loss Account, and their 
balances (that is the difference between their debit and 
credit columns) are transferred to Profit and Loss Account at 
the end of the year or other time for closing the books. Sev- 
eral of these accounts, which represent the general con- 
standly recurring expenses of the business, are commonly 
lumped into one account, called Expense Account. Dis- 
count and Interest is a single account representing both 
receipts and payments or allowances for discount or interest. 
Expense Account and Discount and Interest, and all losses 
or gains on any other account, such as Merchandise Account, 
are closed into I rofit and Loss Account at the end of the year. 

Invoice Book. An Invoice Book is a book in which all 
purchases of goods and all bills for expenses are recorded. 
In small concerns having a limited amount of transactions in 
each month they may be entered directly in the Journal, but 
in larger concerns an invoice book of some form is used, 



and its summarized records are entered monthly in the 
Ledger. It may be either a book similar to the Journal, all 
entries being written in it, or it may be a large bound book of 
blank manila leaves in which the biUs are pasted monthly 
after being sorted and arranged in alphabetical order. A 
vertical letter filing case may be substituted for the book, the 
bills being filed in folders labeled with the names of the cred- 
itors and arranged alphabetically. 

Invoice Ledger and Sales Ledger. In order to prevent the 
Ledger from being too bulky, when there are a great many 
personal accounts to be kept, the personal accounts are 
removed from it, putting the accounts of creditors in a sep- 
arate book, called an Invoice Register, Invoice Ledger, 
Purchase Book, or Accounts Payable Book, and the accounts 
of debtors or customers in a Sales Ledger. The monthly total 
of the entries in the Invoice Book is entered in the General 
Ledger to the credit of Accounts Payable, " By Sundries," 
and this account is debited " To Cash " for the total monthly 
cash payments of invoices. The monthly total of sales 
shown in the Sales Book is charged in the General Ledger to 
the debit of Sales Account or Accounts Receivable, "To 
Sundries," and this account is credited monthly with the total 
cash receipts from sales. 

Having thus described the general principles of double- 
entty bookkeeping we will in the next chapter illustrate their 
application to an ordinary commercial business. 

The Trial Balance. When all the monthly entries have 
been posted into a double-entry ledger from the Cash Book, 
Journal, Sales Book, Invoice Register or other books, fhe 
ledger will be "in balance" if the entries have been made 
correctly, for in double entry the sum of the debit items 
entered must always equal the sum of the credit entries. If 
we make a list of all the open accounts in a ledger and sum 
up the totals on the debit side and on the credit side of each 
account these two totals will balance, but this is not often 
done; it is sufficient to take the balance or differences of the 
two sides of each account and wqte them on the Dr. or Cr. 
sides of the trial balance, according to whether the Dr. or Cr. 
sides of the account is greater. The sum of the balances 
on the two sides, if no error has been made, must be equal. 

If the ledger is found to balance, that is, the trial balance 
shows that the sum of the Dr. balances equals the sum of the 
Cr. balances, it is generally assumed that the ledger has been 
properly posted and that it represents the true condition of 
the accounts. There are, however, possible errors which the 
trial balance does not reveal. They are: 1, Failure to post a 
journal entry, both Dr. and Cr. sides. 2, Posting an entry 
to a wrong account. 3, Making two errors in posting or in 
addition, or subtraction, or the transcribing from the ledger 
to the trial balance, one of which balances the other. As a 
possible means of finding an error of this kind, several steps 
may be taken. 

1. Compare the balance of Cash in the Trial Balance with 
that in the Cash Book. 

2. Compare Bills Receivable with the total of notes receiv- 
able on hand. 

3. Compare Bills Payable with the balance shown in the 
Bill Book. 



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4. Compare Accounts Receivable with the total balances 
in the sales ledger or with the total of unpaid accounts shown 
in the carbon copies in the file of customer's accounts 
impaid. 

5. Compare Accounts Payable with the total of unpaid 
bills in the Invoice Register or with the total of the file of 
unpaid bills for purchases. 

6. Compare the present month's trial balance with the one 
of the previous month to see if the figures of those accounts 
in which there have been no transactions or entries during 
the month (such as Real Estate, OflSce Furniture, Capital 
Stock, Bond and Mortgage) are unchanged. 

If the two sides of the trial balance do not agree there is an 
error somewhere and it must be searched for until it is found. 
When the ledger has a great number of accounts this is often a 
long and tedious operation. The error may be in the trial 
balance itself; it may be found by taking a new trial balance, 
verifying the lead-pencil footings of the Dr. and Cr. sides of 
each account and the difference between them, which is 
entered'in the trial balance. If the second trial balance shows 
the same figures as the first, then the postings in the ledger 
must be checked against the figures in the Cash Book, Journal 
and other books from which the postings were made, the 
bookkeeper or clerk calling off the figures from the several 
lx)oks while an assistant checks their posting in a ledger. . If 
the error is not found in the posting, then the several books 
must be examined to see if the debit entries balance the 
credits. If the error remains undiscovered, the next step, 
and it is a long one, is to find if the previous month's trial 
balance correctly represents the difference between the lead- 
pencil footings of the Dr. and Cr. columns of the ledger when 
the trial balance was taken, then to post that trial balance 
in a new temporary ledger made on sheets of paper, then post 
in that ledger every entry of the month, first verifjring the 
figures of the Dr. and Cr. items of each entry; then take a 
trial balance of the temporary ledger and compare it with the 
original trial balance. 

One of the best ways to lessen the trial balance difficulty 
is to have as few accounts as possible in the general double- 
entry ledger, keeping the Sales Ledger and the Purchase 
Ledger by sin^e entry. The accounts of a factory should be 
kept in a separate set of books from those of the general 
offices, the whole of the operations of the factory being repre- 
sented in the general ledger by a single Manufacturing or 
Factory Operating Account. 

Perhaps the best of all the ways is to adopt the Column 
Ledger or Combined Journal-Ledger which is its own trial 
balance. This is fully described later. 

THE BOOKKEEPER, THE ACCOUNTANT, AND THE 
ENGINEER 

A bookkeeper, is a man skilled in the art of keeping the books 
of a business. A good bookkeeper is a good penman, quick at 
figures, rapid and accurate in making entries, posting the 
ledger, taldng trial balances and the like. 

An accountant is a man versed in the theory and practice 
of accounts, capable of originating a bookkeeping system and 



of directing the bookkeeper, and skilled in interpreting the 
language of bookkeeping and in making reports and drawing 
conclusions from the records in the books. 

A cost accountant is a man who possesses not only the 
general knowledge and skill of an accountant, but who has in 
addition the special knowledge and experience necessary to 
originate and keep a system of accounts which will show in 
gross and in detail the costs of a manufacturing or other 
industrial or financial operation, and to make reports and 
draw conclusions from records of costs. 

An industrial engineer is a man capable of managing an 
industrial enterprise, and who possesses as part of his equip- 
ment such a knowledge of cost accounting as will enable him 
to supervise and direct the cost accountant. 

Engineers need sound knowledge of the principles of double- 
entry bookkeeping, if for nothing else, to enable them to exercise 
a close, intelligent and independent supervision of manufacturing 
costs. — Humphreys. 

Relation between the Accountant and the Efficiency 
Engineer (C. E. Knoeppel and Harold Burt, Journal 
of Accountancy, Vol. 21, 1916, p. 101): 

The real trouble is this: The accountant looks upon the 
efficiency movement as a visionary, radical and revolutionary 
thing, full of inconsistencies, because it seems to violate aU the 
principles of good accounting practice. The engineer views 
accounting as a theoretical exposition of facts and figures which 
are misleading, incorrect, as well as dangerous to use, and violate 
ing all the rules of good practical management. 

The accountant and the engineer can get together if each 
will get away from the feeling that the other does not know 
what he is talking about. 

The accountant and the engineer should hold frequent con- 
ferences and each study the work of the other. Both should 
recognize that the engineer is concerned with the things that are 
to be accomplished while the accountant is concerned with things 
that have been accomplished. 

A slight modification of the wording of the first of the above 
quotations would make it more accurate. For " the account- 
ant," in the first line, read ** some accountants of the old 
school," and for " the engineer " read " some half-educated 
engineers, who are not versed in modem accounting practice." 
The fact is that within the last few years industrial engineers 
and accountants (or a few of them at least) have got together, 
and each knows what the others are talking about. In 
many cases industrial engineers are accountants themselves 
and are training other accountants. 



The student who wishes to learn more of the details of 
bookkeeping than are given in the above highly condensed 
treatment is advised to purchase two or three old books on 
the subject at a second-hand book store and get the views of 
different authors on the fundamental theory, then for a 
great variety of detailed instruction and forms, with much 
good advice, get a recent edition of J. H. Goodwin's Improved 
Bookkeeping and Business Manual, published by Mr. Good- 
win at 1547 Broadway, New York City. 



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CHAPTER II 
TITLES AND DEFINITIOKS OF ACCOUNTS 



Stock 

When a man is in business for himself his individual 
account, representing the capital he has invested in the 
business, is commonly called "Stock." It might be called 
"Capital," "Owner," or "Proprietor," or the man's name 
might be used. 

George Robertson (Partner's name) 

When there are partners each partner has an account under 
his own name. The credit balance of each partner's account 
represents the amount of his interest in the business. 

Capital Stock; Common Stock; Preferred Stock 

In the case of a corporation the par value of the stock- 
holders' interests is represented by an account called Capital 
Stock. If there are two kinds of stock there is an account 
for each. The credit balance of Capital Stock account (or 
accounts) is the par value of the stock issued or outstanding. 
A Stockholder's Ledger (not a part of the general books) is 
kept to show the number of shares that each stockholder owns. 
A stockholder is credited in it with the number of shares he 
owns and charged with the shares he parts with. 

Profit and Loss Account (Loss and Gain) 

To this account are transferred all the profits and losses 
shown in the accounts representing business transactions. 
If an account shows a profit (there being a balance on the 
credit side of it after the inventory balance has been added) 
the amount of that profit is transferred to the credit of Profit 
and Loss Account by a journal entry. If an account shows 
a loss, such as an expense account, the amount of that loss is 
charged to Profit and Loss. 

Profit and Loss is Debited with Losses 
and Credited with Profits. 

Loss and Gain 
Debit Losses Credit Gains 

An item on the left or debit side of the ledger is an asset if the 
amount eventually will be received, is a loss if the amount 
eventually will not be received. 

An item on the right or credit side of the ledger is a liability if 
the amount will eventually have to be paid; is a gain if the 
amount will eventually not have to be paid. — Humphreys. 

There is an apparent exception to the latter statement in 
the fact that Capital Stock, Surplus, Proprietor's account, 
and usually Profit and Loss, are on the credit side of the 
ledger, and do not " eventually have to be paid," but this 
is not in reality an exception, for the amounts of these 



accounts represent the indebtedness of the business to its 
owners, and it will eventually have to be paid to them if the 
assets are all sold and the business wound up or " liquidated." 

Surplus; Dividend 

If Profit and Loss account, after all the entries have been 
made in it at the end of a fiscal period, shows a credit balance 
that is the net profit. If it shows a debit balance that is the 
net loss. 

In either case the account may be closed in red ink To (or 
By) Balance, and the balance brought down. 

Or in case of a business owned by a single proprietor it may 
be closed by a journal entry, transferring the profit to the 
credit side of Stock Account or the loss to the debit side of 
that account. 

In the case of a partnership, the balance of Profit and Loss 
Account is to be subdivided among the several partners in 
accordance with the terms of the partnership agreement, and a 
journal entry made transferring each partner's share of the 
profit or the loss to his individual account. 

In the case of a stock company the disposition of the bal- 
ance of Profit and Loss Account depends on the decision of 
the directors. They may decide to leave the account open 
and bring the balance down, and this is generally done when 
the account has a debit balance, showing a loss or " Deficit " 
on the year's business. If there is a gain the account may be 
charged through a journal entry, and Dividend Account 
credited, with such portion of the profits as it is deemed 
advisable to distribute to the stockholders, another portion 
may be transferred to one or more Reserve accounts, such as 
Reserve for Bad Debts, another portion to Surplus account, 
representing the increased value of the business over the par 
value of the outstanding Capital Stock. When the di\ddends 
are paid in cash. Dividend Account is charged and Cash 
credited. 

Merchandise Account 

Merchandise Account in ordinary bookkeeping is a mixed 
account. We charge it with the cost of our purchases at the 
invoice price. If we are allowed a discount of 2 per cent for 
prompt cash payment we do not credit Mdse. but credit Dis- 
count. If we keep the merchandise several months before sell- 
ing it we do not charge it with storage, insurance or interest 
on the investment, but let these expenses be hidden in the 
expense accounts. If we sell the goods we credit Mdse. 
account not with the cost of the goods sold but with their 
gross selling price. If we allow the purchaser a cash discount, 
we do not charge it against Mdse. Acct. but against Discount. 
When we take a balance of Mdse. Acct. we do not get the 



6 



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TITLES AND DEFINITIONS OF ACCOUNTS 



value of our Mdse. assets, but a figure which is made up of 
value of the goods on hand and of the profits or losses on the 
goods that have been sold. In order to separate the value 
of the goods on hand from the profits or losses it is necessary 
to take an inventory. 

EXAMPLE 

Buy $1000 worth of goods. Allowed 2 per cent discount 
for prompt payment, J20. Shall we make the entry on the 
Cr. side of the Cash Book, By Mdse. $980, or shall we make it 
By Mdse. $1000 and enter on the Dr. side To Discount $20? 
It is customary to do the latter on the theory that we shall 
probably have to give a cash discount when we sell the goods, 
or that we may have to keep them for some months before 
selling them, costing us interest on the investment, storage 
and insurance, so that they will cost us $1000 before they are 
sold ; also on the theory that financial accounts like Discount 
and Interest should be kept separate from Mdse. account, in 
order to have the books show how much we gain or lose 
by taking or giving discounts. Suppose we sell the goods, 
after keeping them three months, for $1100 and allow 2 per 
cent discount for cash. The entries then will be: 

CASH 



Jan. 10 
Apnl 10 



To Discount 
To Mdse. 



20 , Jan. 10 ! By Mdse. 
1100 'I April 10 ; By Discount 

:i \ 



1000 
22 



MDSE. 



Jan. 10 , To Cash 



I 
1000 ! April 10 

ll 



By Cash 



1100 



DISCOUNT 



April 10 



To Cash 



22 jJan. 10 

I, 



By Cash 



20 



Increase of Cash, $98; Profit on Mdse., $100; Loss on 
Discount, $2. Net profit on the transaction, apparently, $98, 
no entries having been made of the loss due to expenses, such 
as interest on the use of the money, which might have been 
invested in goods having a more rapid turnover, and storage, 
insurance, cost of handling, clerical work, etc., all of which 
are covered in the general expense accounts, which are not 
apportioned to particular transactions. 

Trading Account; Purchase Account; Sales Account 

On account of the complex nature of Merchandise Account 
some accountants split it up into two or three accounts, 
Trading, Purchase, and Sales. One author goes so far as to 
say that Mdse. Acct. is obsolete and that no first-class modem 
bookkeeper would use it, although perhaps 99 per cent of all 
bookkeepers do use it. Purchase Account, or Merchandise 
Purchased is charged with the cost of purchased goods and 
credited, Sales, or Trading, being charged, at the cost price, 
for the goods sold, the balance showing the cost of goods 
remaining imsold. Sales, or Trading, is credited, Cash or 
Accounts Receivable being charged, with the selling price of 
the goods sold. When all three accounts are used Purchases 



is charged with the cost of goods purchased, Sales is credited 
with the selling price of the goods sold, and at the end of the 
fiscal period Trading Account is opened, charged with the 
cost of the goods sold. Purchases being credited, and cred- 
ited with the total credit balance of Sales Account. When 
these entries are made the balance of Trading shows the 
profit or loss on the goods sold. Trading Account may also 
be charged with the balances of the various expense accounts 
connected with the handling of the goods, and charged or 
credited with discount and interest, and in that case the bal- 
ance of the account will show the profit or loss on the whole 
trading business. 

An example of the use of Trading Account will be found on 
page 25. It is doubtful if the advantages claimed for this 
method are sufficient to overcome the objections of increasing 
the number of accounts and the increased difficulty of taking 
trial balances. 

Merchandise Returned; Sales Allowances 

These items may be entered in Mdse. Account or in sep- 
arate accounts as may be found most convenient. If we 
return goods that we have purchased and credited to the 
party from whom they were purchased, Mdse. being charged, 
we make a counter entry, charging them back to the party 
and crediting Mdse. If goods have been returned to us 
that we have charged to the party to whom they were sent, 
crediting Mdse., we make a counter entry crediting the party 
and charging Mdse. By this method the Dr. side of Mdse. 
contains a record not only of the goods we have purchased 
but also of those that have been returned to us, and the Cr. 
side includes both the sales of goods and the goods that we 
have returned. Allowances, rebates, etc., may also be 
included in Mdse. Acct. 



Dr. 



BXAan>LE 

Merchandise 



Cr. 



To Jones« purohased from 

him 
To Brown, returned by him 
To Brown, allowed him 



1000 

200 

30 



I By Jones, returi^ed to him 
I By Brown, sold him 
By Jones, allowance for 
defects 



too 

500 



40 



Dr. 


Jones Cr 




To Mdse. returned to him 
To Mdse. allowance by him 


100 
40 


By Mdse. bought from him 


1000 


Dr. 


Brown Cr 




To Mdse. sold him 


500 


By Mdse. returned by him 
By Mdse. rebate allowed 
him 


200 
50 


Or the entries may 
Dr. » 


be made as follows: 




To Jones 


1000 







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BOOKKEEPING AND COST ACCOUNTING 



Dr. 


MdM. 


Sales 


Cr 








By Brown 


500 


Dr. 


Mdse. Returned 


Cr 




To Brown • 


200 


By Jonea 


100 



* The entriee in thia account appear to read wrongly, for Mdae. waa not 
returned to Brown and returned by Jonea, nor were allowancea made to 
Brown and by Jonea, but juat the opposite. The Bookkeeper, however, 
will read thorn correctly: Mdae. returned Dr. To Brown, for gooda returned 
by him, and Mdae. Returned Cr. By Jonea, for gooda that we returned 
to Jonea. 



Dr. 



Allowancea 



Cr. 



To Brown . 


50 


By Jonea 


40 


Dr. Jonea Cr. 


To Mdae. Returned 
To Allowancea 


100 
40 


By Purchaaea 


1000 


Dr. Brown Cr. 


To Sales 


500 


By Merchandiae Returned 
By Allowancea 


200 
50 


Dr. Trading Account (entriea at end of year) Cr. 



Bal. Mdae. on Hand 
Total Purchaaea 
ToUl Mdae. Returned 
Total Allowancea 
Profita on Mdae. 



Total Salea 

Total Mdae. Returned 
Total Allowancea 
Bal. Invty. (red ink) 



Still another method of making these entries is to have 
Mdse. Account ruled in columns, as below: 



Di 






Merchandiae 


- 


Cr. 


Allow- 
ancea 


Retuma 






Salea 


Retuma 


Allow- 
ancea 


50 


200 


1000 


Jonea 
Brown 


500 


100 


40 



The Jones and Brown accounts being treated in the ordinary 
way. In very large concerns having hundreds or thousands 
of personal accounts Mdse. Account may be kept as a con- 
trolling* account in the private ledger, entries of totals of 
Purchases, Sales, Returns and Allowances being made in it 
once a month, separate ledgers being kept for each of these 
subdivisions. The monthly entry in the controlling account 
might be made in two lines, Accounts Payable and Accounts 
Receivable taking the place of Jones and Brown in the form 
shown above. These subordinate ledgers may also be further 
subdivided into departmental merchandise ledgers or ledgers 

♦The word "control" as used by accountants does not mean 
control in the ordinary sense, it means rather to condense or sum- 
marise. An entry in a controlling account is a total of the entries 
in several subordinate or detail accounts kept in another book. 



for different classes of goods, and the general Mdse. Account 
in the private ledger may likewise be subdivided as desired. 

The general principle upon which these subdivisions should 
be made is that they shall furnish all the information that 
the management needs concerning the merchandising part 
of the business, in gross, by smnmaries, or in detail, with the 
least possible duplication of entries or cost of clerical labor. 

Each transaction is recorded originally upon a piece of 
paper, such as an invoice of goods received, a carbon copy of a 
bill for goods sold, or a credit memorandum. These may be 
sorted and filed every day by departments or by classes of 
goods and alphabetically by names of debtors and creditors, 
and at the end of the month verified by comparing them with 
the monthly statements received from creditors or sent out 
to debtors. These statements then become original records 
for permanent filing and their totals are transcribed to the 
Invoice Register or Purchase Ledger or Departmental or 
Class Ledgers as the kind and extent of the business may 
require, and to Sales Registers or Ledgers. These books 
should have as many columns as may be needed to show kinds 
of goods, discounts, returns and allowances, and it is only the 
totals of these columns that need to be posted in the con- 
densed private ledger. 

Accounts Receivable; Accounts Payable 

In old-fashioned double-entry bookkeeping, with a single 
ledger, these accounts were unknown. The personal account 
of each debtor and creditor was entered under his own name. 
There were, however, accounts called Sundry Debtors and 
Sundry Creditors, which were used to keep in one place entries 
with such debtors and creditors as were likely to have only 
one or two transactions with us in a year. When entries 
were made in them the man's name was written on the line in 
either the Dr. or Cr. side, whichever was needed for the first 
transaction with him, a sale or a purchase. 

EXAMPLE 



Di 




Sundry Debtors 




Cr. 


Jan. 10 
Feb. 17 


J. Smith 
R. Johnson 


M 
17.15 1 Mar.lO 
26.40 


Cash 


17.15 




Sundry Creditors 




Feb. 15 


To Cash 


1' 
46.50 Jan. 15 
: Feb. 12 


M. L. Ewen 
P. J. Franklin 


i 46 50 
' 57.10 



In modem bookkeeping, purchases, except cash purchases, 
are entered in an Invoice Register or Purchase Ledger, and 
the monthly total is credited to Accounts Payable m the 
general ledger, charging the footings of the columns headed 
Mdse., Expense, Supplies, etc., to these accounts. The 
monthly total of sales, except cash sales, is charged ''Accounts 
Receivable to Mdse." in the General Ledger, the charges 
against the individual debtors being made in the Sales 
Roister or Sales Ledger. The Dr. balance of Accounts 
Receivable should equal the sum of the Dr. balances of the 



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TITLES AND DEFINITIONS OF ACCOUNTS 



individual accounts in the Sales Ledger. The Cr. balance of 
Accounts Payable should equal the total amount that we 
owe on individual accounts in the Purchase Ledger. 

Bills (or Notes) Receivable 

Notes, Bills of Exchange, or Acceptances (accepted time 
drafts) in our possession and payable to us, are called Bills 
Receivable (or Notes Receivable). They are usually entered 
in the order of their receipt (or alphabetically if numerous) in 
a Bill Book. 



Transactions 



(t) We sell Mdse., $1000 to 
Jones on 60 day credit and 
and take his note due 60 
days hence in settlement. 



(2) Having sold Smith $2000 
Mdse. and charged his ac- 
count with it, we take his 
interest-bearing note in 
settlement. 



(3) Instead of an interest-beai^ 
ing note Smith gives us a 
3-months' note for the ac- 
count including interest 



(4) Note (I) is renewed at the 
end of 60 days, we received 
a new note for the same 
amount and a $10 check 
for interest. 



(5) Instead of (4) Jones pays 
$400 cash on account and 
$10 interest and gives us 
a new note for $600 



<6) We discount at Bank Note 
(2) after it has run two 
months. The Bank credits 
us $2020 



(7) Note (3) is discounted 30 
days before it is due. The 
bank credits us $2020 



(8) We draw on Brown at 30 
days for the balance of his 
account, $1000 plus $15 
interest which will then be 
due, and he returns the draft 
"Accepted." 



Journal or Cash Book Entriz 



Bills Rec. 



1000 



To Mdse. 



1000 



Bills Rec. 



2000 



To Smich 2000 



Bills Rec. 



2030 



To Smith 
To Interest 



2000 
30 



Cash 10 To Interest 10 

No Journal entry is needed. The new 
note is entered on the Bill Book, and tho 
entry of the old note is marked "re- 
newed." 



Cash 



410 



To Bills Roc. 400 

To Interest 10 

In the Bill Bools. the entry of the old note 

is marked " Pd. $400 on a/c. New note 

for $600." 



Cash 



2020 To Bills Rec. 2000 
To Interest 20 



Cash 
Interest 



2020 To Bills Rec. 2030 
10 



Bills Rec. 



1015 



To Accts. Rec. 

(Brown) 1000 
To Interest 15 



Bills (or Notes) Payable 



Transactions 



(9) We buy Mdse. $1000 on 60 
days credit, and give a 60- 
day note in payment 



(10) We owe Johnson $2000 
and give him an interest- 
bearing note 



(1 1) Instead of (10) we give 3- 
roontbs Note with $30 in- 
terest added. 



Journal or Cash Book Entries 



Mdse. 



1000 



To Bills Payable 

1000 



Accts. Payable To Bills Payable 

(Johnson) 2000 2000 



Accte. Payable 


To BUls Payable 


2000 


2030 


Interest 30 





Tranbactionb 



(12) The bank discounts our 
own note for $1000, credit- 
ing us $990 



(13) We renew note (11) giving 
a new 3-moe. note and a 
check for $30 interest 



(14) We accept Simpson's time 
draft on us in payment of 
account due him $1000 and 
$10 interest 



(15) We pay note (10) which 
has 2 months' interest 
accrued 



Journal or Cash Book Entries 



Cash Dr. 1000 To BilU Payable 

Cash Cr. 10 1000 

By Interest 10 

(Entry on both sides of cash book) 



Cash Cr. By Interest 30 

The new note is entered in the Bill Book 

and the entry of the old note is marked 

" Renewed." 



Accts. Pay. 

son) 
Interest 



(Simp- 

1000 

10 



To Bills Pay. 1010 



Bills Payable 
Interest 



2000 
20 



To Cash 



(Entry on Cr. side of Cash Book) 
By Bills Pay. 2000 By Interest 



2020 



20) 



If each one of the above entries represented a separate 
transaction the Cash Book entries would be as follows: 





Dr. 


Cash 


Cr 




(4) 


To Interest 


10 


(12) 


By Interest 


10 


(5) 


To Bills Rec. 


400 


1 (13) 


By Interest 


30 




To Interest 


10 


. (15) 


By BiUs Pay. 


2000 


(6) 


To Bills Rec. 
To Interest 


2000 
20 


(15) 


By Interest 


20 


(7) 


To Bills Rec. 


2020 








(12) 


To Bills Pay. 


1000 









The Bill Book entries would be as below: 

Bills Receivable 



Dr. 


Acct. 


Cr. 
Acct. 


Cr. 

Int. 


Total 


Dr. 


Acct. 


Dr. 
Int. 


(1) 
(2) 
(3) 
(8) 


Mdse. 
Smith 
Smith 
Brown 


1000 
2000 
2000 
1000 


30 
15 


1000 
2000 
2030 
1015 


(5) 
(6) 
(7) 


Cash 400 
Cash 2000 
Cash 2020 


10 



Bills Payable 



Dr. 








Acct. 


Dr. 
Acct. 


Dr. 
Int. 


Cr. 

B.Pay. 


(15) 


Cash 


2000 


(9) 


By Mdse, 


1000 




1000 








(10) 


By Johnson 


2000 




2000 








(H) 


By Johnson 


2000 


30 


2030 








(12) 


By Cash 


1000 




1000 








(14) 


By Simpson 


1000 


10 


1010 



The Bill Book usually contains numerous columns for 
Date of Note, Drawer, Endorser, Amount, when Payable, 
Accts. Credited (or Debited) and Remarks. 

Interest Account in the General Ledger, posted monthly 
from the footings of the Interest Columns in the Cash Book 
and Bill Book would show the following: 

Dr. Interest Cr. 



Cash 
Bills Rec. 
Bills Pay. 




40 
45 



85 



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10 



BOOKKEEPING AND COST ACCOUNTING 



Balancing Bills Receivable and Pasrable. 
Interest Account 

It is customary to enter all bills receivable and bills pay- 
able at their face value, whether this value includes interest 
or not, and on balancing the books at the end of the year to 
bring down the balances of notes unpaid at their face values. 
It is also customary to make entries charging or crediting 
interest when interest is added on the note at the time the 
note is drawn, but when the note is interest-bearing to make 
the interest charge or credit only when the interest is paid. 
At the end of the year, when interest account is balanced, if 
there is a Dr. balance it is charged, and if there is a Cr. 
balance it is credited to Profit and Loss. There is a certain 
inaccuracy in this method, since at the time of balancing the 
notes may be worth something more or less than their face 
values, depending on whether the notes are interest-bearing 
and have interest accrued on them but not entered, or whether 
interest to a future date has been added in the face value of 
the note but is not yet accrued. Also Interest Account may 
not show the true profit or loss, for there may be interest 
accrued but not entered or entered but not accrued. To 
correct these inaccuracies by Journal entries to an Interest 
Adjustment Account, or to such accounts as Accrued Interest 
Payable, Accrued Interest Receivable, Interest not Accrued, 
etc., introduces a complexity in the bookkeeping that is 
usually considered to be more trouble than it is worth. It is 
better to let the inaccuracy correct itself as it does when the 
notes are paid, and to make a memorandum of it, if thought 
desirable, on the balance sheet. 

Suppose that on December 1st White and Black each owes 
us S2000 and that we owe Gray and Green each $1000. 
White gives us a three-months' note, including interest, for 
$2030, and Black gives us an interest-bearing note for $2000. 
We give Gray a three-months' note for $1015, and Green a 
demand note, interest-bearing, for $1000. The Ledger 
entries are: 

Bills Receivable 



Dec. 1 


To White 
To Interest 
To Black 


2000 
30 


2030 
2000 










4030 




BiUs Payable 










Dec. 1 


By Gray 1000 
By Interest 15 
By Green 


1015 
1000 

2015 


Interest 


Dec. 1 


To Bills Pay. (Gray) 


15 


By Bills Rec. (White) 


30 



On balancing the books we find that we own Bills Rec. 
$4030, that we owe Bills Pay. $2015, and that Interest shows 
a profit of $15. The actual present worth of White's note, 



however, is only $2010, $20 out of the $30 interest not having 
yet accrued, and the present worth of Black's note is also 
$2010, $10 having accrued on it, making the two notes worth 
$4020 instead of $4030. Our present liability on Gray's and 
Green's note is $1005 each, or $2010 for the two, instead of 
$2015. We have earned $10 interest on White's note and 
$10 on Black's, a total of $20, instead of $30, and $5 each has 
accrued on our notes to Gray and Green, a total of $10 instead 
of $15. Net profit on interest account $10 instead of SI 5. 
Rather than make a lot of adjustment entries in the journal 
and ledger, involving the opening of one or more new ledger 
accounts, to reconcile the book values with the present values 
of Bills Receivable and Bills Payable, and to show the exact 
profit on Interest Account, it is better to let the balances 
appear as they are in the accounts, and to put a footnote in 
the Balance Sheet showing the present values and the actual 
profit. A footnote should also show our contingent liability 
on notes that we have endorsed, and a statement of any Bills 
Receivable of which there is a doubt as to their being paid. 

Suspense Account 

If there are Bills Receivable, or Accounts Receivable, of 
which there is a serious doubt of their being collectible, they 
may be taken out of their respective accounts and charged 
to Suspense account until they are either paid or found to be 
of no value, in which latter case Suspense acct. is credited 
and Profit and Loss charged with them. 

Various Property Accounts 

All the property that a concern possesses may be subdi\ided 
in the bookkeeping system into as few or as many accounts as 
the owner may deem desirable. The goods he buys and sells 
may all be lumped into a single merchandise account, sub- 
divided into Merchandise Purchases, Merchandise Expense, 
Merchandise Sales, Trading Acct., etc., or into classes of 
goods, as Mdse. Dept. A, Dept. B, or Wheat, Com, Oats, etc. 
His factory property may be handled in one account, Factorj^ 
or divided into Land, Building, Machinery, Power Plant, etc. 
Store equipment may be divided into Store Fixtures, Office 
Fixtures, and other accounts. 

In making up a scheme for subdivision of the property 
accounts the owner should ask himself the following ques- 
tions: What do I wish to have a doUar-and-cent record of in 
regard to my property and the various parts into which it 
may be divided. Do I wish this record in gross or in greater 
or less detail? If I wish it in great detail, is it necessary to 
get it all into the shape of double-entry journal and ledger 
accounts? Should it all be in one ledger or in several ledgers? 
Will it not be well to have a private double-entry ledger with 
only a few controlling accounts, covering the business as a 
whole, and to have separate books or filing cabinets containing 
the details? What statistical reports, weekly, monthly or 
annual do I need? Can a statistical system be devised which 
will get the information directly from original documents, or 
must it all be got from the ledger? 

Whatever system be devised for the subdivision of the 
accounts there will necessarily be a double-entry ledger to 



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TITLES AND DEFINITIONS OF ACCOUNTS 



11 



cover the whole business, and there may be subordinate 
ledgers for details. 

Balancing Property Accounts 

In all ledger accounts representing property the method of 
keeping the account is the same, viz.: 

1. On opening the account enter the inventory or appraisal 
value of the property represented by the account. 

2. Debit the account with the value of all additions to the 
property, whether by work done on it, or by purchases for it; 
and with all expenses incurred on account of it which increase 
its value. 

3. Credit it with aU values returned by the property 
whether by sale or by transfer to other branches of the whole 
property. . 

4. At the end of the fiscal period have an inventory or 
appraisal of the property made, and enter the value, in red 
ink, on the credit side of the account By Balance (Invty.) 



5. Add up both sides of the account and find the differ- 
ence. If the Cr. side is the larger there is a profit, if the Dr. 
side is the larger there is a loss. Enter the profit or loss on a 
memorandum of profits and losses which is to be used in 
making a journal entry. 

6. When all the property accounts have had their profits 
or losses determined in this way, two journal entries are made. 



VIZ. 



Sundries 



To Profit and Loss 



For profits on the following accounts. 
(Here enter the accoimts with the several amounts ) 
Profit and Loss To Sundries 

For Losses on the following accounts. 

7. Post these journal entries to the several accounts in the 
ledger. 

8. The two sides of each property account will now be 
equal. Rule the account, enter the total on both sides, and 
bring down the balance, entering on the Dr. side To Balance 
(Invty.) $ 

Investments in Bonds and Stocks 

If we invest any portion of our capital in bonds or stocks 
either because we have no immediate need of it in our active 
business, or because we wish to have some of our capital 
available for quick turning into cash in case of an emergency, 
the accounts of such investments are kept in the same manner 
as those of any other property accounts. Debit at cost what 
we receive, credit at the selling price what we part with or 
sell. At the close of the fiscal period, or at any other con- 
venient time, take an inventory, credit Profit and Loss 
with gains, charge it with losses. If we borrow money, giving 
a note with stocks or bonds as collateral. Cash and Interest 
are debited and Bills Payable credited, no entry being made 
to Stocks and Bonds account, but in the list of stocks and 
bonds mark the ones used "Deposited as Collateral." 



Mortgage or Bonded Indebtedness 

If on beginning business we have a bond or mortgage lia- 
bility, it is entered on the Cr. side of the Bond and Mortgage 
Account, and if we give a bond for cash or settlement of some 
account, Cash (or other account) is debited and Bond and 
Mortgage credited. When we pay cash in full or on account 
of bonded indebtedness. Bond and Mortgage is debited and 
Cash credited. 

Expense Accounts 

All expenditures except those for merchandise or other 
property are charged either to Expense account or to one or 
more of the several accounts into which it may be sub- 
divided. Some of these are Rent, Insurance, Taxes, Repairs, 
Salaries, Freight and Express, Postage, Cleaning, Fuel, Light, 
Heat, Power, Salesmen's Expense, Stationery, Advertising, 
Traveling Expense, Charitable Subscriptions, Accidents, 
Legal Expense. In manufacturing concerns Factory Expense 
may be subdivided into a hundred or n(^ore subordinate ac- 
counts. To keep all these accounts in the usual form of 
double-entry ledger involves an intolerable amount of clerical 
work, therefore, many kinds of "short-cuts" have been 
designed by which all the necessary information concerning 
the details of the various expenditures may be obtained with 
a minimum expenditure of time and labor. Some of these 
are described elsewhere in this work. 

Expense account (or any subdi\asion of the account) is 
charged with expenditures, Cash, Petty Cash, Accounts Re- 
ceivable or other account being credited. In balancing the 
books at the end of the year Profit and Loss is debited and the 
expense account credited with the Dr. balance of the account, 
except that when any part of expense can be considered as 
an asset, such as unexpired taxes or insurance, or advertising 
paid for this year but belonging chiefly to next year's busi- 
ness, or the cost of a catalogue which will be useful for years 
to come, the amount that is estimated to be an asset is inven- 
toried and brought down as a balance. i 

Advance Payments and Accrued Expenses. Insurance is 
usually paid in advance, sometimes for a year, sometimes 
for three years. The entry is Insurance Dr. to Cash (or, in 
the Cash Book, Cash Cr. By Insurance), the insurance being 
an expense. When the books are balanced at the end of a 
fiscal period, so much of the insurance as has not expired is 
an advance payment for a future expense, and is, therefore, 
not an expense of the period but an asset. It may be closed 
in the books into an account called Advanced Expenses, and 
show in the Balance Sheet as an asset, but it is just as well, 
and less troublesome not to open this new account, but to let 
Insurance Account remain open, crediting it and charging 
Expense Account with the amount of the insurance that has 
expired, and leaving the balance to Insurance Account, rep- 
resenting the amount paid in advance. In the case of insur- 
ance paid on factory buildings, equipment and stores, the 
amount paid is charged on the general books to Insurance, 
and once a month the account is credited, Factory Operating 
Account being charged with the monthly proportion, or one- 
twelfth of a year's insurance. 

Taxes are usually paid at some other time in the year than 



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12 



BOOKKEEPING AND COST ACCOUNTING 



the date of closing the books. If the books are closed on 
June 30th and December 31st, and the taxes are paid on 
October 1st for the year ending December 31st, then the 
June balance sheet should show on the Dr. side of Accrued 
Taxes one-half of a year's taxes, the amount of an expense 
or loss that has accrued but has not been paid. 

Advanced pa3m[ient8 not belonging to the expense of the 
current period, but to the next fiscal period, or to other future 
periods, are also known as Deferred Charges. 

Consignment Accounts 

When we ship goods to a branch store, to an agent or to a 
commission house to be sold for us we open a Consignment 
Account, also called "Shipping" or "Adventure" account, 
charging it with the goods at our cost figures, and also with 
any expenditures we may make on account of the consign- 
ment, such as freight, insurance, etc. The consignee from 
time to time sends us an "Account Current" or "Account 
Sales" charging us with any expenditures he may have made 
on account of the consignment, such as drayage, storage, 
repacking, etc., and also with his conmiission on the sales he 
has made; and crediting us with any advances we may have 
made him for his expenses and with any money he has received 
on account of the goods he has sold. The account current 
contains also a statement of the goods sold and an inventory 
of the goods remaining on hand. On receipt of the account 
current we make the proper entries to the Consignment 
Account, charging it and crediting the agent, if we keep a 
personal account with him, for his disbursements, crediting 
it and charging him for his receipts if he has not paid them 
over to us. When they are paid we credit him and charge 
Cash. When the goods are all sold and a final account cur- 
rent rendered the consignment account is balanced and Profit 
and Loss is credited with the profit or charged with the loss on 
the consignment. If at the end of the year any of the goods 
remain imsold they are inventoried at their present value at 
their present location, cost plus freight, etc., less depreciation, 
if any, and this inventory value is brought down as a balance 
for next year, the entry to Profit and Loss being made as in 
the case of Mdse. Account. 

Commission Business 

When we receive goods from another party to be sold by 
us on commission, we receive with the goods an invoice which 
we file as an inventory of goods received on commission. 
We open an account with the consignor, charging him for 
any payments we may make on account of the goods, such as 



drayage, insurance, labor, etc., also with our commission on the 
goods sold, and with any remittances we may make from col- 
lections we have made from the parties to whom we have sold 
the goods. We render to the consignor an account sales or ac- 
count current, showing the disbursements and receipts, a state- 
ment of the sales made, moneys collected and still due, inven- 
tory of goods on hand, and balance due to or by the consignor. 

An Account Current or Account Sales is a formal itemized 
statement made by the consignee to the consignor giving all 
the charges and credits entered on the consignment account, 
and a statement of the goods remaining unsold. 

Classification of Accounts — Accounting Code. In large 
concerns it is customary for the chief accountant to have a 
book in which all the titles of the accounts are listed, usually 
in alphabetical order, together with a description of each 
account and of the kind of transactions that are to be recorded 
on its debit and credit sides. Copies of this book, sometimes 
called the Accounting Code, are available for use by the book- 
keepers, to enable them to preserve a uniform system of 
classification and method of making the journal entries for 
every possible kind of transaction. 

SOME DEFmrriONS 

Capital. Money or wealth employed in any business. 

Capital, fixed: Invested in property in a permanent form 
(lands, buildings, machinery). 

Capital, active or working: Cash, or property, or assets, 
that can easily be turned into cash, also raw material, work in 
progress, finished product in warehouse. 

Capital Stock. The indebtedness of the business to its 
stockholders, as represented by the shares of stock issued to 
the stockholders, together with the shares held as "Treasur}' 
Stock" for sale or for issue in the future, for which "Treasury 
Stock" account is debited. 

Capital stock appears on the general ledger as a liability, 
and it is, therefore, entered on the Cr. side of the ledger. 

Capital expenditure, charges to capital. Chai^ges to 
revenue, charges against income. 

The word "capital" is used in two opposite senses: 1, 
The assets of the business, or net assets, entered on the Dr. 
side of the ledger; 2, the amount of capital stock, issued or 
held for future issue, entered on the Cr. side. 

When money is spent for a new machine it may be charged 
to Machinery Acct. as an asset of the factory, or it may be 
charged to repairs or expense, if it is a new machine replacing 
an old one that is worn out. In the former case it is called 
by some writers a charge to capital or a capital expenditure, 
and in the latter case a charge to revenue or income. 



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CHAPTER III 
THE EVOLUTION OF BOOKKEEPING. THE COLUMN LEDGER 

Bills Receivable 



The beginning of double-entry bookkeeping was the use 
of the Journal with its debit and credit columns, and of the 
Ledger with its debit and credit sides. Every transaction To Sundries 

was entered first in the Journal and then in the Ledger. A 

series of transactions would appear in the Journal as follows: 



408 



By Sundries 



408 



Cash 


to Proprietor 


600 


600 


Mdse. 


to Jones (purchase) 


300 


500 


Smith 


to Mdse. (sale) 


400 


400 


Sundries 

Jones — ^in 
luterest 


to BUls Payable 
payment of his acct. 


500 
10 


510 


Bills Receivable 

to Sundries 

to Smith, his a/c. pd. by note 

to Interest on note 


408 


400 
8 


Sundries 

Cash 
Interest 


to Bills Receivable 

Smith's note discounted at bank 


401 
7 


408 


Bills Pay. 


— pd. Jones's note 
To Cash 


510 


510 


Cash 


To Mdse. Cash sales 


150 


150 


Expense 


(PayroU) 
To Cash 


50 


50 



These entries would be posted into the ledger as below: 

Proprietor 



By Cash 



600 





Cash 




To BUls Rec. 
To Mdse. 


600 
401 
150 


By BHls Pay. 
By Expense 


510 
50 


560 




1151 



Mdse. 



To Jones 



500 



By Smith 
By Cash 



400 
150 



Bills Payable 



To Cash 



510 



By Sundries 



510 



Interest 


To Bills Pay. 
To Bills Rec. 


10 
7 


By Bills Rec. 


8 


Expense 


To Cash 


50 






Jones 


To Bills Pay. 


500 


1 
By Mdse. 


500 


Smith 


To Mdse 


400 


By Bills Rec. 


400 



The Trial Balance taken after the above Entries are posted 
would be as follows: 



Dr. 


Trial Balance 


Cr. 


Cash 

Interest 

Expense 


591 

9 

50 


Proprietor 
Mdse. 


600 
50 




650 


650 



The first modification of this system was the taking of the 
separate Cash transactions out of the Journal and entering 
them in a Cash book, the footings of the two sides being 
entered in the Journal at the end of the month — thus: 



Dr. 



Cash Book 



Cr. 



To Prop. 
To Mdse. 
To Bills Rec. 



600 
150 
401 



1151 



By Bills Pay. 
By Expense 



510 
50 



560 



13 



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14 



BOOKKEEPING AND COST ACCOUNTING 



Journal 



Caah 










To Sundries 


1151 






To Prop. 




600 




ToMdse. 




150 




To Bills Rec. 




401 


Sundriea 










To Cash 




560 


Bills Pay. 




510 




Expense 




50 





Interest 

To Bills Rec. 
Int. on Smith's note 



The Ledger then would show: 

Dr. Cash 



Cr. 



To Sundries 



1151 



By Sundries 



560 



Bills Rec. 



To Sundries 



408 



By Cash 
By Int. 



401 
7 



This modification introduced one objectionable feature, the 
making of an entry in two different books when a note was 
discounted, one in the Cash Book, for the net cash received, 
and the other in the Journal, for the interest charged. This 
objection was avoided by making an entry on the debit side 
of the Cash Book for the face value of the note and on the 
credit side for the interest; thus. Cash Dr. to Bills Rec. $408; 
Cr. by Interest $7, on the fiction that Cash received $408 for 
the note and paid $7 interest, instead of receiving the net sum 
of $401 with which the bank credited its customer. A sim- 
ilar plan was followed when discounts were allowed for prompt 
pa^gnent of invoices. If instead of our giving Jones a note 
for $500 in settlement of his account for $500, he offers to 
take $495 for prompt cash and we draw a check for that 
amount, an entry By Jones $500 is made on the credit side 
of the cash book and To Interest $5 on the debit side. 

When the number of discount and interest transactions 
became large, an improvement was made in the Cash Book 
by adding a discount and Interest column to each side, a 
column crediting Discount and Interest account on the Cr. 
side, and one debiting that account on the Dr. side. Thus, 
in paying Jones's account of $500 with $495 cash the entry 
on the credit side of the Cash Book is 



Cr. 


Cash Pd. 


Dr. Acct. Cr. Dis. and 
, Int. 


By Jones 


495 


500 


5 



The $500 is posted to the debit of Jones, balancing his account, 
and the footing of the column headed Cr. Dis. & Int. is 
credited to that account. Cash being charged. 

In like manner if Smith instead of giving us a note for $408 
in payment of his account of $400 with interest gives us his 



check for $398, we making him an allowance of $2.00, the 
entry on the Dr. side of the Cash Book is 



Cash Dr. 


Cash 
Received 


Cr. Acct. 


Dis. and 
Int. Dr. 


To Smith 


396 


400 


2 



In posting. Smith's account is credited $400, and the footing 
of Dis. & Int. column is debited, Cash being credited. When 
the Cash Book is journalized at the end of the month, the 
discounts being received and allowed as above stated, the 
entries are: 



Cash 






To Sundries 


1155 




To Prop. 




600 


To Mdse. 




150 


To Smith 




400 


To Dis. A Int. (from Jones. Cr. side of Cash Book) 




5 


Sundries 






To Cash 




552 


Jones 


500 




Expense 


50 




Dis. A Int. (from Smith. Dr. side of cash Bk.) 


2 





Accounts Receivable. Accounts Payable 

The next development, in the direction of simplifying the 
general Ledger, as the number of accounts increases to such 
an extent as to make the Ledger too bulky and the labor of 
balancing it too' great, is to remove from it the personal 
accounts with debtors and creditors, putting them into a 
Sales Ledger or Accounts Receivable Book, and into a Pur- 
chase Ledger or Invoice Register, or Accounts Payable Book. 
In the general Ledger the accounts thus removed are repre- 
sented by two controlling accounts. Accounts Receivable or 
Sundry Debtors or Trade Debtors, and Accounts Payable, 
or Sundry Creditors or Trade Creditors. Two new columns 
are added to the Cash Book, one on the Dr. side with the 
heading Accts. Rec'l., and the other on the Cr. side, headed 
Accts. Pay. 
The Cash Book entries will then appear as follows: 



Cash 


Dr. 
Caah Rec. 


Dr. 

Dis. and 

Int. 


Cr. 
Acct. 
Rec'I. 


Cr. 

Sundry 
Accts. 


To Prop. 
To Mdse. 
To Smith 


600 
150 
398 


2 


400 


600 



Cash 


.Cr. 
Cash Pd. 


Cr. 

Dis. and 

Int. 


Dr. 
Accts. 
Pay. 


Dr. 
Sundry 
Accts. 


By Jones 
By Expense 


495 
50 


5 


500 


50 



Smith's account in the Sales Ledger, which has been debited 
$400 by posting from the Sales Book, is credited $400 from 



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THE EVOLUTION OF BOOKKEEPING. THE COLUMN LEDGER 



15 



the Accts. Receivable column in the Cash Book, and Jones's 
account in the Purchase Ledger which has been credited $500 
by posting from the Invoice Register is debited $500 from 
the Accts. Payable, in the Cash Book. 

In journalizing and posting Cash at the end of the month, 
Cash is made Dr. to Accts. Receivable, and credited by 
Accts. Payable for the amounts of the footings of the 
columns so named. 

If many notes are received or given two other columns are 
added, Bills Receivable on the Dr. side and Bills Payable on 
the Cr. side. 

The Column Cash Book. In this way the Cash Book 
develops into a Column Cash Book containing from six to 
ten columns on each side according to the number of accounts 
in the General Ledger the entries to which are numerous 
enough to warrant their being grouped together. One col- 
umn on each side will be headed Sundry Accts., to contain 
entries for which no place is provided in the other colunms. 



Dr. 




Cash 










Cash 
Reed. 


Dia. A 
Int. Dr. 


Crxdit Accra. 


Name of Cr. Acct. 


Mdae. 


BUls 
Rec. 


Acct. 
Rec. 


Sundry 
Accta. 

















Caah 



Cr. 





Cash 
Pd. 


Dia. A 
Int. Cr. 


Debit Accra. 


Nameof Dr.Acct. 


Bills 
Pay. 


Accts. 
Pay. 


Mdse. 


Exp. 


Sundry 
Accts. 



















When the column Cash Book is used it is not necessary to 
journalize it at the end of the month. The colunm footings 
may be posted directly into the General Ledger, the few 
entries in the Sundry columns being posted to their proper 



accounts. Another development of the Cash Book is the 
provision of a Petty Cash Book, also provided with several 
columns, to take care of a great number of small items with 
which it is not desired to cumber the Cash Book. The 
footings of the columns of the Petty Cash Book may be 
entered on a line above the footings in the principal Cash 
Book, in the proper columns, or they may be posted sep- 
arately into the Ledger as may be most convenient. 

The Invoice Register is also a book of several columns, the 
number of them depending upon the number of classes into 
which it is desired to subdivide the materials or other things 
or services purchased. For example, the headings may read 
Mdse., Expense Supplies, Expense Ser\ices, Repairs, SeUmg 
Expenses. The footings of the several columns may be 
journalized, crediting Accounts Payable for the total, or they 
may be du^ctly posted into the Ledger. The Sales Book or 
Register of Charge Sales (made up from sales tickets) usually 
needs only one or two columns, and the journal entry in the 
general Ledger is a single one. Accounts Payable Dr. to Mdse., 
but if it is desired to subdivide Mdse. into several classes this 
may be done by means of different columns with appropriate 
headings. The individual entries in the Sales Book are 
posted to the individual accounts in the Sales Ledger. 

The Bill Book. When the business involves the handlmg 
of a great number of notes or Bills Receivable and Bills Pay- 
able it is well to have a Bill Book as a book of original entry 
for recording these notes. Usually Bills Receivable are 
received only in settlement of Accounts Receivable and 
interest, and Bills Payable are given only in settlement of 
Accounts Payable and interest, so that only three columns 
are needed, Face of Note, Interest, and Dr. (or Cr.) Account, 
but a fourth column may be added for the notes given or 
received on any other account. Separate pages, or in large 
businesses separate books, are used for Bills Receivable and 
Payable. 

THE EIGHT-COLUMN JOURNAL 

The Journal is sometimes ruled with six, eight or ten 
money columns, half on one side and half on the other, with a 
wide central column for the description of the transaction; 
and two narrow columns for the entry of the ledger folio 
after postmg to the ledger. The following is an example: 



Dr. 




















C-. 


Sundry 


Interest 


Accta. 


Mdse. 


L. F. 


February 26, 1917 


L. F. 


Mdse. 


Accts. 


Interest 


Sundries. 


Accta. 


& Diact. 


Rec. 












Pay. 


& Disct. 










500 




Mdae. to J. Jones 


y/ 




300 






A/c Pay 
400 


10 


300 






T. Smith A Sons. To BUls Pay. Interest 
W. Brown. To Mdse. 


40 


300 






BUls Pay 
410 


BiUsReo 






















204 










Bilb Rec. To C. Jackson. Interest 


v/ 






4 


A/c Reo 
200 



The meaning of these entries is (1) we bought Mdse. from 
Jones and credit him in the Invoice Register or Accounts 
Payable Book; the check showing that the credit has been 
entered. (2) We having credited Smith in the Accts. Pay- 
able Book for Mdse. purchased S400, now give him a note for 



$410, including $10 interest. We credit Bills Payable (the 
thing given) $410 and charge Accts. Payable in the Sundry 
Accounts Column $400, posting the amount to Smith's 
account in the Purchase Ledger and charge Interest (it being 
a loss) on the Dr. side in the Interest column. (3) We sell 



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16 



BOOKKEEPING AND COST ACCOUNTING 



Brown $300 of Mdse. on account, charging Accts. Receivable 
in Dr. side of the Journal, and posting the amount to Brown's 
account in the Sales Ledger. (4) Jackson gives us his note 
$204, in payment of his account $200 and $4 interest. We 
charge Bills Receivable (the thing received) $204, crediting 
Interest (a gain) on the credit side of the Journal, and Accts. 
Rec. in the Sundries Column on the credit side $200, crediting 
Jackson this amount in the Sales Ledger. The several col- 
umns are footed and the totals at the end of the month are 
posted into the proper accounts in the general ledger. The 
footings of the sundry columns are subdivided into their 
respective accoimts, thus in the above, on the Dr. side $400 
is posted to Accts. Payable and $204 to Bills Receivable. 

When an account is posted into the ledger the number of 
the ledger page is entered in the journal in the column L.F. 
(ledger folio). 

THE SAFEGUARD LEDGER 

A form of sales ledger known as the Safeguard Ledger, 
which is used by many large concerns, is illustrated in Fig. 1. 



The size of the page is 15 x 12 in. and a double page contains 
the entries for six months. A perforated crease is made in 
the June column on the right-hand page to allow the folding 
in of a strip of the width of the name column, so as to expose 
the name column on the left-hand page when the July and 
December entries are made. By this means the names have 
to be written only once a year. There are 79 numbered 
lines to a page besides a line for footings at the bottom. The 
number of lines allowed to an account depends upon the 
number of entries that are expected to be made in a 'month, 
as determined by inspection of the old ledger. The debit bal- 
ances from the old ledger are entered as shown in Column 1. 
In Column 2 are entered the debits, taken from the Sales 
Book or Sales Tickets, and the credits, whether cash, re- 
turned goods, or allowances, are entered in Column 3. 
After the debits and credits for the month have been 
posted each customer's account is balanced by adding the 
amount of his purchases to the old balance and subtracting 
the amount of his credits. The balance thus found is entered 
in Column 4. 



2 


(D 




JANUARY 

(8) (3) 


(4) 




Dedgnedbj 
Ssfeirasrd Aoeonnt Oompeay 
Ghioago New York Boston 




NamM 


Tim. 
tnm 


Debit 
ikilMic* 


DM* 


BoA 
Fat« 


IteM 


Debits 


Date 


Book 


Credits 


Debit 
Bslsnce 


doll 
forFe 


imnn 
)ruax7 


Dote 


Book 
PaC 


Credits 


Tnao. 
to 








Ud. 
A. 




























Ma 


rch 

















8. S. Pierce Oo. 


2S6 


780 


83 


3 


204 




V 12B 


- 


2 


1 


V 600 


— 




V 


M 


ril 














1 








V 


21 


245 




V 876 


- 


81 


8 


V 790 


Ot 






M 














2 
8 
4 


BOfltOQ. 

Mass. 








28 


288 




V 
600 


67 
67 














Ji; 


ne 


















. 6 
6 


(Five lines or any multi 


}le qj 


Ave a 


•ei 


lou 


edf 


vreoi 


h 
































7 


account according the ; 


roha 


He ma 


tin 


wn 


%un 


ber 




















1 














8 


ofentriee in a vMnth) 












































9 


































t 














10 


John B. StetaoD Go. 


286 


407 


08 


16 


246 




V 26 


— 






V 407 


63 


600 


_ 




\ 












10 


U 








V 


18 


240 




}/ 46 


— 






V 70 


— 






^ 














12 


PhlladelpUa, 








20 


204 




867 


60 
















■• 














18 
14 


Pa. 








21 


200 




182 
670 


60 
00 














1 














TO 




nun 


bered 


Tti 


79) 








~~" 












~~ 


1 


1 












)A 




Totml. 




1188 


00 








1079 


87 






1787 


67 


600 












... 




^ 








a^B 


« 




=«« 








B 




^^mmmmmm 






^ 


SBC 





Fig. 1. — The Safeguard Ledgeb. 



Each page is footed separately, and if no error has been 
made in balancing the sum of Columns 1 and 2 should equal 
the sum of Columns 3 and 4. Instead of taking a trial bal- 
ance in the old way the footings of each page are transferred 
to a Proof Book, which contains four columns corresponding 
to those of the ledger, and these columns are footed. The 
total of the Transferred Balance column shows the amount 
outstanding from customers at the time of transfer of the 
accounts from the old ledger; the debit colunm total shows 
the charges to all customers during the month, and it should 
equal the total charges in the Sales Book; the credit total 



should agree with the total credits to customers as shown 
by the Cash book and Allowance or other auxiliary books; 
and the debit balance total shows the amount owing by cus- 
tomers at the end of the month. Errors in posting are shown 
by the differences between the total proved footings of the 
columns and the proved footings of the books from which the 
postings were made. 

The several advantages of this form of ledger over the old 
style ledger are fully explained in a handsome illustrated 
circular issued by the manufacturers, The Safeguard Account 
Co., New York. 



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THE EVOLUTION OF BOOKKEEPING. THE COLUMN LEDGER 



17 



THE COLUMN LEDGER, OR COMBINED JOURNAL- 
LEDGER 

The greatest recent improvement in bookkeeping systems 
is the abandonment of the ordinary Journal and Ledger and 
the substitution for them of the "Combined Journal-Ledger," 
or Column Ledger. It is merely a stage in the evolution 
which began with the adoption of the Column Cash Book and 
the Column Invoice Register. It consists of a single sheet 
for each month's transactions, ruled with columns and hori- 
zontal lines, with the titles of the active accounts printed at 
the heads of the columns and at the left of the horizontal 
lines. Entries are made from the books of original entry by 
simply transcribing the column footings of these books into 



the Ledger. If an entry, Mdse. to Accts. Payable S3000, is 
to be made from the Invoice Register, it is done by once 
writing the amount in the Ledger column, Accts. Pay. Cr., 
on the line Mdse. Dr. Writing the figure once makes a 
double entry, charging one account and crediting another, 
just as a single entry on the Dr. side of the Cash Book at the 
same time charges Cash and credits the Account for which the 
cash was received. To illustrate the Column Ledger sys- 
tem of bookkeeping an example of handling a month's trans- 
actions, as shown in the books of original entry, by means of 
the ordinary Journal and Ledger and by means of the Column 
Ledger is given below. Other illustrations of the use of 
the Column Ledger will be found on pages 32 and 40. 



Column Footmgs of Books of Original Entry 



Cash Book 





Debit Accts. 








Credit Accta. 














Mdse. 


Accts. Reel. 


Bills Pay. 


BiUs Rec. 


Exp. 


Int. 


Cash Dr. 


13,250 




1200 


5000 


4000 


3000 


10 


40 





Credit 










Debit Accts. 








• 




Sundries. 




Mdse. 


Accts. Pay. 


Bills Pay. 


Labor. 


Exp. 


Int. 


Cash Cr. 


11.910 


1 Store Fix. 


30 


200 


6500 


4500 


300 


350 


30 



Balks Book 



Accts. Reel. 



Dr. 



5050 



Mdse. 



Cr. 



5000 



Exp. 



Cr. 



50 









Inyoicb Rboistbb 










Cr. 




Dr. 




Dr. 




Dr. 


Accts. Pay. 


3400 


Mdse. 


3000 


Exp. 


300 


Repairs 


100 



Bill Book 



Bills Rec. Dr. 
BiUsPay. Cr. 



1015 
1520 



Accts. Reel. Cr. 
Accts. Pay. Dr. 



1000 
1500 



Interest Cr. 
Int. Dr. 



15 
20 











Pat Rou 


[j 










Cr. 


- 


Cr. 




Dr. 




Dr. 


Labor 
Labor 


450 
Dr. 
70 


Mdse. 


Cr. 


70 


Expense 


400 


Mdse. 


50 



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18 



BOOKKEEPING AND COST ACCOUNTING 



In the common system of bookkeeping these footings 
would be joumaJized at the end of the month as follows: 



CMh 






To Sundries 


13,250 




Mdse. 




1.200 


Aoota. Reel. 




5,000 


Interest 




40 


Bills Pay. 




4,000 


Bills Rec. 




3,000 


Expense 




10 



Sundries 






To Cash 




11,910 


Mdse. 


200 




Store Fix. 


30 




Accts. Pay. 


6.500 




BUls Pay. 


4,500 




Labor 


300 




Expense 


350 




Interest 


30 





Accts. Receivable 


5.050 




To Sundries 






To Mdse. 




5.000 


To Exp. (supplies sold) 




50 



Sundries 




3.400 


To Accts. Pay. 






Mdse. 


3,000 




Exp. 


300 




Repairs 


100 





Bills Receivable 


1,015 




To Sundries 






To Accts. Reel. 




1.000 


To Int. 




15 



Sundries 

To Bills Pay. 
Accts. Pay. 
Interest 




Labor 

To Mdse. 



70 



1,520 



Sundries 






To Labor 




450 


Expense 


400 




Mdse. 


50 





70 



The Trial Balance of the Ledger before posting the 
above Journal Entries may be as follows: 







Dr. 






Cr. 




Cash 


1.000 


9 


Proprietor 


10,500 




Bills Rec. 


4.000 


10 


Profit & Loss 


1.000 




Accts. Rec. 


6,000 


11 


Bills Pay. 


8.000 




Mdse. 


10.000 


12 


Accts. Pay. 


7.000 




Real Estate 


5.000 


13 


Labor 


300 




Store Fix. 


500 


14 


Interest 






Expense 


300 










Repairs 












26,800 


26.800 



After posting the above Journal Entries the Ledger will 
appear as below: 



Bal. 

To Sunds. 



Bal. 



Bal. 
To Cash 



To Accts. Pay 



To Cash 



To Cash 
To Bills Pay 



(3) Accts. Rec. 



6.000 
5.050 



By Cash 
By Bills Rec. 



(4) Mdse. 



(5) Real Estate 



5,000 



(6) Store Fixtures 



500 
30 



(7) Expense 



(8) Repairs 



100 



(9) Proprietor 



Bal. 



(10) Profit & Loss 



Bal. 



(II) Bills Pay. 




(12) Accts. Pay. 



6,500 
1.500 



Bal. 

By Sund. 





(1) 


Cash 




Bal. 
Sunds. 


1.000 
13.250 


Sunds. 


11.910 


(2) Bills Rec. 


Bal. 

To Sunds. 


4,000 By Cash 
1,015 

1 


3,000 



5.000 
1.000 



Bal. 


10,000 


By Cash 


1.200 


To Cash 


200 


By AccU. Rec. 


5.000 


Accts. Pay. 


3.000 


By Labor 


70 


To Labor 


50 







Bal. 


300 


' By Cash 


10 


To Cash 


350 


1 By Accts. Rec. 


50 


To Accts. Pay. 


300 


1 




To Labor 


400 


1 





10.500 



1.000 



8,000 
4,000 
1.520 



7.000 
3.400 



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THE EVOLUTION OF BOOKKEEPING. THE COLUMN LEDGER 



19 





(13) 


Labor 




To Cash 
To Mdse. 


300 
70 


Bal. 

By Sund. 


300 
450 


(14) Interest 


To Cash 
Bills Pay. 


30 

20 j 


By Cash 
By Bills Rec. 


40 
15 



After taking a trial balance of the ledger to prove the cor- 
rectness of the posting, Mdse. shows a Dr. Balance of $6980, 
Expense a/c $1290, Repairs $100, and Interest has a credit 
bal. of S5.00. If the Inventory shows that Mdse. unsold has 
a value of S8400 and that there are Expense Assets on hand 
of a value of $250, viz.. Supplies charged to Expense and not 
yet used, $50, prepaid Taxes $100, prepaid Insurance $100 — 
entries may be made in the Journal for the Profits and 
Losses as follows: 



Sundries To Profit & Loss 

Mdse. 

On hand as per inventory 
Less Dr. Bal. of Acct. 

Interest, Cr. Bal. of Acct. 




1425 



Profit & Loss To Sundries 




1140 




To Expense 








Dr. Bal. of Exp. Acct. 


1290 






Less expense assets per in- 








ventory 


250 




1040 
100 


To Repairs. Dr. Bal. Acct. 







After these entries are posted a balance sheet is made 
out, as follows: 



1 


Cash 


2.340 


9 


Proprietor 


10,500 




Bills Rec. 


2.015 


10 


Profit A Lobs 


1.285 




Accts. Rec. 


5,050 


n 


BiUs Pay. 


9.020 




Mdse. 


8.400 


12 


Accto. Pay. 


2.400 




Real Estate 


5,000 


13 


Labor 


380 




Store Fix. 


530 


14 


Interest 






Expense 


250 










Repairs 












23.585 


23.585 



When the column ledger system is used, the entries are 
posted into it directly from footings of the books of original 
entry shown on p. 17, and from the Profit and Loss entries 
in the Journal. 











Monthly Column Ledger oi 


Combined Journal-Ledger 












1 

1 


Cbbdit Accounts 






Charges 


1 


2 


3 


4 


5 


6 


7 


8 


9 


10 


II 


12 


13 


14 


Total 
Charges 






Cash 


Bills 


Accts. 


Mdse. 


R.£st. 


Store 


Exp. 


Reprs. 


Prop. 


P. AL. 


Bills 


Accts. 


Labor 


Int. 








Rec. 


Rec. 






Fixt. 










Pay. 


Pay. 








I 


Cash 




3000 


5000 


1200 






10 








4000 






40 


13,250 


2 


BUlsRec. 






1000 






















15 


1.015 


3 


Accts. Rec. 








5000 






50 
















5,050 


4 


Mdse. 


200 


















1420 




3000 


50 




4,670 


5 


R.Est. 
































6 


Store Fixt. 


30 




























30 


7 


Expense 


350 






















300 


400 




1.050 


8 


Repairs 
























100 






100 


9 


Proprietor 
































10 


Profit A Loss 














1040 


100 














1.140 


II 


Bills Pay. 


4,500 




























4.500 


12 


Accts. Pay. 


6,500 




















1500 








8.000 


13 


Labor 


300 






70 






















370 


14 


Interest 


30 
















• 


5 


20 








55 




Total Credits 


11.910 


3000 


6000 


6270 






1100 


100 




1425 


5520 


3400 


450 


55 


39,230 



The postings in the Column Ledger are made directly from 
the books of original entry in the following manner. From 
the Column Cash Book the total cash receipts $13,250 is 
entered on line 1 in the last column. Total Charges. The cor- 
responding credits are taken from the footings of the columns 
on the Dr. side of the cash book and entered on line 1 under 
the proper headings. The total credit of cash, $11,910, is 
entered at the bottom of column 1, opposite total credits, 
and the corresponding debits to the several accounts are 
taken from the footings on the Cr. side of the Cash Book and 
entered in column 1 opposite the names of the several accounts. 
The entries Accts. Receivable Dr. to Mdse. $5000 and To 
Expense $50 are made from the footings of the Sales Book. 



The entries Bills Receivable Dr. To Accts. Receivable $1000 
and To Interest $15, and the credits of Bills Payable, Accts. 
Payable Dr. $1500 and Interest Dr. $20, are taken from the 
Bill Book. The credits to Accts. Payable, Mdse. Dr. $3000, 
Expense Dr. $300, and Repairs Dr. $100, are obtained from 
the footings of the Purchase Book or Invoice Register. The 
Credits to Labor, Mdse. Dr. $50 and Expense Dr. $400, and 
the debit entry Labor to Mdse. $70, are taken from the pay- 
roll. 

When all these entries are made the totals of the columns 
and of the horizontal lines are entered in lead pencil, and the 
sums of these totals must agree if there are no errors in addi- 
tion. When the inventory of Mdse. is taken and the profit 



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20 



BOOKKEEPING AND COST ACCOUNTING 



on this account is figured, the Profit and Loss entries may be 
made directly in the Ledger, preferably in red ink, viz.: 
P. & L. Dr. To Expense $1040 and To Repairs $100, and Cr. 
By Mdse. $1420 and By Interest $5, and then the footings 
should be entered in ink and the total debits and credits 
balanced. 

The column ledger should be a printed and ruled sheet, 
perforated for insertion in a loose-leaf book. An objection 
is sometimes made to the column ledger, that the bookkeeper 
is apt to make a mistake in putting a figure in the wrong 
column or on the wrong line, but this can happen only from 
gross carelessness. If the bookkeeper will fine himself $5 
for the first error of this kind he will not be likely to make a 
second. 

After balancing the column ledger the totals are transferred 
to the transaction columns of the Balance Sheet, as shown 
below, and the figures added to (or subtracted from as the 
case may require) those in the Balance Sheet at the beginning 
of the month, to obtain the figures of the balance at the end 
of the month. 

Balance Sheet 







Bal. Jan. I 


Transactionb 


Bal. Fbb. 1 




Dr. 


Cr. 


Dr. 


Cr. 1 


Dr. 


Cr. 




Cash 


1.000 




13.250 


11,910 


2.340 






Bills Rec. 


4.000 




1.015 


3.000 


2.015 






A/c Rec. 


6.000 




5.050 


6.000 


5.050 






Mdae. 


10.000 




4.670 


6.270 


8.400 






R. Est. 


5.000 








5,000 






Store Fix. 


500 




30 




530 






Expense 


300 




1.050 


I.IOO 


250 






Repairs 






100 


100 








Proprietor 




10.500 








10.500 




Profit & Loss 




1.000 


1.140 


1.425 ' 




1.285 




Bills Pay. 




8.000 


4.500 


5.520 




9.020 




A/c Pay. 




7.000 


8.000 


3.400 




2.400 




Labor 




300 


370 


450 




380 




Interest 
Total 






55 


55 

1 








26.800 


26.800 


59.230 


39.230 ; 


23.585 


23.585 



In using the ordinary ledger a condensed statement of the 
course of the business for a month can be obtained only after 
compiling from the books a statistical abstract. In the 
Colunm Ledger system the ledger itself is at the same time a 
statistical abstract, a trial balance and a balance sheet, 
furnishing at a glance all the information that can be 
obtained only with a great amount of labor from the ordi- 
nary ledger. 

Notes on the Combined Journal-Ledger System 

It is impossible for the Journal-Ledger to be out of balance 
provided the figures in the horizontal lines and in the vertical 
columns are correctly added. The total debits must equal 
the total credits, fulfilling the fundamental principle of 
double-entry bookkeeping. 

The Journal-Ledger may, however, contain errors which 
must be carefully guarded against. These are: 



1. Omission of items which should be entered. 

2. Entering of an item in the wrong column or on the wrong 
line. 

3. Entering an item which is an erroneous footing in the 
book of original entry. 

4. Transposition of figures in making an entry (writing 
76 for 67). 

Against these may be put the list of possible errors in the 
Ledger and Trial Balance in the ordinary system* 

1. Omission of a Journal entr>'. 

2. Omitting to post a Journal entry. 

3. Posting an entry to a wrong account. 

4. Entering in the Journal and posting in the Ledger an 
erroneous column footing of a book of original entr>'. 

The Ledger may be in perfect balance notwithstanding 
these errors, and taking a Trial Balance will not lead to their 
discovery. The following errors are likely to be discovered, 
when a hunt is made for them, after taking a Trial Balance 
and finding it out of balance, except in the case of two errors 
balancing each other: 

5. Errors in adding the Dr. and Cr. columns in a Ledger 
account. 

6. Errors in subtractmg the Dr. and Cr. colunm foot- 
ings. 

7. Errors in entering the balances in the Trial Balance. 

8. Transposition of figures in posting a Journal entry. 

9. The Journal entry out of balance. 

Excepting No. 8, these errors cannot take place in the com- 
bined Journal-Ledger system. 

There are many chances of making the four above-named 
errors to which the Journal-Ledger is liable, and, therefore, 
there is a necessity for providing means for checking against 
them. One of the best means is described below: 

The books of original entry are: 



Symbol. 

C and PC 
W 
B 

R 



Cash Book and Petty Cash Book. 

Salary List and Pay Roll. 

Bill Book, for Bills or Notes Receivable and Pay- 
able. 

Accounts Payable Book or Invoice Register. 

Sales Book, or Sales Ticket Register, and Sales 
Allowance Book. 

Day-book Journal for any entries that do not 
find their proper place in the other books, such 
as Profit and Loss entries. 



Each of these books is provided with such columns as may 
be needed for debits and credits of Mdse., Expense, Interest 
and Discount, or other accounts, and it is the footings of 
these accounts which are entered monthly in the Journal- 
Ledger. 

When the footings of these accounts are entered in the 
Journal-Ledger they are at the same time entered in Double- 
entry on a printed or typewritten blank as shown below: 



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THE EVOLUTION OF BOOKKEEPING. THE COLUMN LEDGER 



21 









Check on 


Journal-Ledger Entries 














Financial Accra. 


Md8B. and Expense Accra. 


Book 


Account 


Dr. 


Cr 


Account 


Dr. Totals 


Cr. TotaU 


C 

PC 

W 

B 

B 

R 


|c«8h 

Sal. & WagM 
Notes Rec. 
Notea Pay. 
Accts. Pay. 
Acctfl. Rec. 

Add Mdse. & Ezp. 

Total 

Profit & L06B 
Mdae. 
Expense 
Interest 
Proprietor 

Total Profit and Loss 
Total Journal-Ledger 


1311 
492 

3358 


63 
00 

31 


690 
574 

2789 
2 


,0 

00 

67 
00 


Mdse. Cash 
Accts. Pay. 
Accts. Rec. 
Notea Rec. 
Notes Pay 

Expense Cash 
Accts. Pay. 
Accts. Rec. 
Sal. & W. 

Interest. Cash 
Accts. Pay. 
Accts. Rec. 


2759 

2 


67 
00 


6 

1301 
3358 


55 
65 
31 


4666 

2 

1 




S 


2761 
198 
30 

574 


67 
90 
00 

00 


2 


00 


51 




5161 
3564- 


94 
57 


4056 
4669 


57 
94 






8.726 

800 
563 


51 

90 
34 


8,726 
1.362 


51 

81 
43 




J 


809 


90 




43 


00 
43 




3564 


57 






4669 


94 




1,364 


24 


1,364 


24 




















10,090 


75 


10.090 


75 





The totals are compared with the figures in the last line 
and the last column of the Journal-Ledger and checked 
against each other. These checked figures are then entered 
in the Transactions column of the Balance Sheet, and by 
adding the Dr. and Cr. figures to those of the balances of 
Jan. 1, the Balances of Jan. 31 are obtained. 

These balances are further checked by comparing the Dr. 
balance of Cash and Notes Receivable with the cash and notes 
on hand; the balances of Accounts Receivable with the total 



of the unpaid items in the Sales Ledger or Sales Cards Un- 
paid; the balance of Notes Payable with the unpaid items 
in the Bill Book, the balance of Accounts Payable with the 
unpaid Invoices; the balance of Wages and Salaries with 
the unpaid items in the Salary List and Pay Rolls, and 
the balance of Property and Mdse. accounts with the in- 
ventories. 

These same comparisons are necessary of course in auditing 
a set of books kept on the ordinary system. 



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CHAPTER IV 
ACCOUNTS FOR RETAIL MERCHANTS. SELLING PRICES. TURNOVER 



The Federal Trade Commission's System. "A System 
of Accounts for Retail Merchants" is the title of a Id-page 
pamphlet issued in July, 1916, by the Federal Trade Com- 
mission, Edward N. Hurley, Chairman. In an introductory 
letter Mr. Hurley says: "With the object of aiding retail 
merchants to improve their accounting methods we have 
outlined a simple system of accounts which provides for 
supplying the information necessary to properly direct a 
retail business." From the introduction the following 
extracts are taken : 

Banks are paying more attention to the accounting methods 
used by the merchant to whom they extend credit. They are 
willing to give larger loans to the merchant who keeps his books 
in a way that enables him to show the bank at any time just how 
his business is progressing. 

Another important point to which the bank gives consideration 
is whether the prospective borrower is making proper provision 
for depreciation on stock, buildings and fixtures, and his books 
should be so arranged as to show the amount of these provisions. 
No merchant can be said to be managing his business properly 
unless adequate provision is made for depreciation. 

The aim has been to devise the least involved system which will 
give the information essential to successful management. The 
best system of accounts for any business is one which furnishes 
the ioformation required with the least efifort. 

The system here outlined requires but four books of account: 



journal, general cash book, invoice book and ledger. Sales 
tickets and credit tickets are used for recording sales and sales 
returns. 

When the volume of business permits, it is advisable to use 
three ledgers, a general ledger, a purchase ledger and a sales 
ledger, keeping controlling accounts of the purchase ledger and 
the sales ledger in the general ledger. 

The pamphlet gives a list of 45 ledger accounts, of which 22 
are "real" or asset and liability accounts, and 23 "nominal" 
or profit and loss accounts, with an explanation of their use, 
showing what debit and credit entries are made in each. 
Examples of transactions and of the method of entering them 
in the several books of original entry, sununarizing them in 
the journal and posting them to the ledger accounts are unfor- 
tunately lacking, but three forms are given, a balance sheet, a 
profit and loss statement of one month's business, and a 
monthly sununary of business, which are copied below. 

In order to make the system more clearly understood by 
the student and also in order to provide a basis for some com- 
ments that it seems to require we have attempted to discover 
and reconstruct from the three forms the journal and ledger 
entries from which the forms given may have been derived. 

From the explanations of the accounts and their uses the 
following paragraphs are taken: 



Monthly Sumiiart or Business, 1916 





Net Sales 


BuTXNO Expense 


Selung Expense 


1 

Dbuvbbt Expense 




Credit 


Cash 


Tqtal 


Salaries and 

Wages of 
Buying Force 


Buying 
£xi>onse 


Salaries and 

Wages of 

Sales Force 




Miscellaneous 

Selling 

Expense. 


Salaries and 
Wages of De- 
livery Force 


Miscellaneous 
Delivery 
Expense 


Jan. 


$3356.31 


$1301.65 


$4657.96 


$25.00 


$14.00 


$177.33 


$30.00 


$3.75 


$102.67 


$8.08 


Feb. 






















Total 
(12 Months) 






















Per cent of 
Net Sales 

























Genbbal Expense 


Total Expense 






Management 

and Office 

Salaries 


Office Supplies 
and Expense 


Insurance on 

Stock and Store 

Equipment 


Taxes on 

Stock and Store 

Equipment 


Losses from 
Bad Debts 


Miscellaneous 
General 
Expense 


Kent 


Per cent of 
Net Sales 


Jan. 


$269.00 


$22.03 


$1.61 


$2.50 


$33.56 


$26.79 


$71.25 


$787.57 


16.9 


Feb. 




















Total 




















Per cent of 
Net Sales 


















' 



22 



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ACCOUNTS FOR RETAIL MERCHANTS. SELLING PRICES. TURNOVER 



23 



Explanations of Some of the Accounts 

4. Reserve for Bad Debts, Credit this account with an esti- 
mated amount based on charge sales, sufficient to provide for 
losses, and charge the account with the balances of personal 
accounts when hope of collection is abandoned. 

5. Prepaid Insurance. Charge with all insurance paid. At 
the end of each month credit the account and charge No. 35 
(Insurance on Stock and Store Equipment) and No. 44 (Rent 
Income) wnth their monthly proportion, the balance being an 
asset as " Prepaid Insurance." 

6. Accrued Interest Receivable, Charge at the end of the period 
with all accrued interest (not yet paid) crediting Interest account. 
When the interest is received it is credited to " Accrued Interest 
Receivable." 

9. Reserve for Deprecialion on Store and Warehouse. Credit 
with the amount of depreciation, charging "Rent Income." 

17. Accrued Interest Payable. Credit at the end of the period 
with interest accrued (not yet paid) on notes, etc., due others, 
charging Interest Account. When the interest is paid it is 
charged to "Accrued Interest Payable." 

18. Accrued Salaries and Wages. — Credit this account with 
salaries and wages earned and unpaid at the end of each month 



and charge the proper expense accounts. When payment is 
made this account is charged. 

19. Accrued Taxes. — Credit with the taxes due up to the end 
of each month, charging the proportionate amounts to the 
accounts to which they belong. When taxes are paid this 
account wiU be charged. 

23. Sales. Credit with the total of the charge tickets for the 
month and the total cash sales from the "Cash Sales" column in 
the Cash Book. Charge the account, at the seUing price, for 
all merchandise returned. The difference in this account will 
be the net sales, which is transferred to the credit of "Trading 
Account." 

24. Sales Allowances. Charge with any allowance given a 
customer not contemplated when the sale was made. Allow- 
ances should not be charged to "Sales," but closed at the end of 
the period into "Trading Accotmt." 

25. Merchandise Purchases. — Charge with the face of the 
invoices before deducting cash discounts; also with freight, 
expressage and drayage. Credit, with merchandise returned 
and with any allowances for defects in goods received. The 
balance of the account is transferred to the debit of "Trading 
Account." 



Balance Sheet, Jan. 31, 1916 



1 

2 
3 

4 


ASSSTS 
CURRENT A88BT8 

Cash on hand and in bank 
Notes receivable — Trade Customera 
Accounts Receivable — Trade Customers 
Less Reserve for Bad Debts 

Inventory of merchandise (at cost) 

Prepaid Insurance 

Accrued Interest Receivable 

Total current assets 

FIXED ASSETS 

Store Property 
Warehouse Property 

Less Reserve for Depreciation on Store and Warehouse 

Store Equipment 
Office Equipment 
Delivery Equipment 

Total fixed assets 

Total assets 

Liabilities and Capital 

CURRENT liabilities 

Notes Payable — Trade Creditore 
Notes Payable— Banks 
Accounts Payable — Trade Creditors 
Accounts Payable — Others 
Accrued Interest Payable 
Accrued Salaries and Wages 
Accrued Taxes 

Total current liabilities 
Mortgages Payable (warehouse) 

Total Uabilities 
Proprietor's Capital Account 

Total liabilities and capital 


$3518 
33 


81 
56 


$1611 
191 

3485 

2909 

100 


67 
84 

25 
06 
14 
^1 


$8298 
7191 


67 
77 


5 
6 


4500 
1975 


00 
00 


7 
8 


6448 

272 

74 

396 


02 
71 
37 
67 


9 


6475 
26 


00 
98 


10 
II 
12 


1210 

900 

3685 

485 

19 

82 

7 


50 
00 
72 
00 
23 
00 
75 




6390 
1250 


20 
00 




15490 


44 


13 
14 
15 
16 
17 
18 
19 






21 






22 


7640 
7850 


20 
24 








15490 


44 









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24 



BOOKKEEPING AND COST ACCOUNTING 

Profit and Lobs Statemxnt, Jan. 31, 1916 



23 
24 


Sales 

Less Sales Allowsnoes 

Net Sales 
Inventory of merchandise at beginning 
Merchandise Purchases (cost delivered at 
store) 

Deduct inventory of merchandise at closing 
Less Stock Depreciation 

Net cost of goods sold 

Gross profits from trading 

BUTINQ EXPENSE. 

Salaries and Wages of Buying Force 
Miscellaneous Buying Expense 

Total buying expense 

SELLING EXPENSE 

Salaries and Wages of Sales Force 

Advertising 

Miscellaneous Selling Expense 

Total selling expense 

DELIVERY EXPENSE 

Salaries and Wages of Delivery Force 
Miscellaneous Delivery Expense 

Total delivery expense 

GENERAL EXPENSE 

Management and Office Salaries 

Office Supplies and Expense 

Insurance on Stock and Store Equipment 

Taxes on Stock and Store Equipment 

Losses from Bad Debts 

Miscellaneous General Expense 

Rent 

Total general expense 

Net profit from trading 

INCOME FROM OTHER SOURCES 

Interest 

Cash Discounts on Merchandise Purchases 

Rent income (net) 

Miscellaneous Outside Income 

Total net profit 


3062 
153 


17 
II 


3451 
2759 


09 
67 


4659 
2 


96 
00 


j'perCt 

0.8 

4.5 
2.4 

9.2 


PerCt 
100.0 

70.9 


25 


4657 
3301 


96 
70 




6210 
2909 


76 
06 




25 
14 


00 
00 


39 

211 
110 

426 


00 

I 

08 ' 

1 
1 
1 

75 ! 
74 


26 
27 


1 1356 

1 

787 


26 

i 

57 


29.1 
16.9 


28 
29 
30 


177 

30 

3 


33 

00 
75 


31 
32 


102 
8 


67 
08 


33 
34 
35 
36 
37 
38 
39 


269 

22 

1 

2 
33 
26 
71 


00 
03 
61 
50 
56 
79 
25 




17 
6 
16 

2 


1 

09 
55 
52 
00 


42 
43 
44 
45 






568 
7 


69 
98 


12.2 










' 


576 


67 



87. LoMes from Bad Debts.* Charge this account with the 
amount that has been reserved for bad debts (4). 

39. Rent. Charge with all rents paid. If the store is owned 
rent should be charged equivalent to the amount it could be 
rented for to others, crediting "Rent Income" (44). In the 
latter event "Rent Income" should be charged with the taxes, 
insurance, repairs and depreciation on the store. 

40. Trading Account. This account shows the inventory of 
merchandise at opening, and it is not touched again until the 
books are closed. It is then charged with Merchandise Pur- 
chases (25) and Sales Allowances (24) and credited with Sales 
(23) and with the inventory at the close. The balance is tran&- 

*Thi8 title is a misnomer since the loss has not actually been 
incurred. A better title would be "Insurance for Bad Debts." 
It represents a monthly expense charge, Reserve for Bad Debts 
being credited, to provide against future bad debts. 



ferred to the credit of * ' Profit and Loss Account." The inventory- 
is then brought down as a new balance. 

41. Profit and Loss Account. Charge with the balances of all 
the expense accounts; credit with the gross profit from trading 
and with the net income from other sources. The difference will 
be the net profit or loss, which is closed into the proprietors 
account; if a partnership, to the partners' accounts according 
to their several interests, and, if a corporation, to the surplus 
account. 

44. Rent Income. If the store is owned, the rent which has 
been charged to account 39 should be credited to this account 
and it should be charged with insurance, taxes, depreciation and 
repairs on store. The account is closed into "Profit and Loss.' 

45. Miscellaneous Outside Income. Credit this account with 
incidental receipts such as toll from telephone pay stations in tbo 
store, etc. 



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ACCOUNTS FOR RETAIL MERCHANTS. SELLING PRICES. TURNOVER 



25 



42. IrUereat, Charge this account with all interest paid and 
credit it with all interest received * and close into ''Profit and 
Loss Account." (Compare Nos. 6 and 17.) 

The journal and ledger entries, which have been derived 
from the monthly statements, are given below: 

Journal 



Journal — (Continued) 



1 


Cash To Sundries 


1 

1 1311 


63 






23 


To Sales 


1 




1301 


65 


43 


To Cash Discta. 






6 


55 


42 


To Interest 






1 


43 


45 


To Misc. 0. Inc. 






2 


00 


1 


Sundries To Cash 






690 


90 


27 


Misc. Buying Exp. 


14 


00 






30 


Misc. Soiling Exp. 


3 


75 






32 


Misc. Delivery Exp. 


8 


08 






33 


Office SuppUee and Exp. 


22 


03 






36 


Misc. Gen. Exp. 


26 


79 






44 


Rent Income (Store Repairs) 


15 


01 






18 


Wages and Salaries 


492 


00 






5 Prepaid Iiuurance 


109 


24 







The two entries above may be omitted from the Journal if 
a Column Cash Book is used and the footings of the colunms 
are posted directly into the Ledger. The following entry may 
also be omitted and posted from the footings of the columns 
of the Pay Roll and salary list. 

Journal — (Continued) 



18 
26 
28 
31 
33 



15 
25 
29 



5 
44 
35 

19 
44 
36 



44 
9 



Sundries To Wages and Salaries 

Salaries and Wages Buying Expense 
Salaries and Wages Selling Expense 
Salaries and Wages Delivery Expense 
Management and Office Salaries 



Sundries To Accts. Payable 

Merchandise Purchases 
Advertising 



Sundries To Prepaid Insurance 

Rent Income 

Insurance on Stock and Store Equipment 



Sundries To Accrued Taxes 

Rent Income 

Taxes on Stock and Store Equipment 



Rent Income 

To Reserve for Dep'n on Store and 
Warehouse 



25 
177 
102 
269 


00 
33 
67 
00 


574 


00 


2759 
30 


67 
00 


2789 


67 


7 
1 


49 
61 


9 


10 


5 

2 


25 
50 


7 


75 


26 


98 ' 


26 


98 



* This is not clear and is not in harmony with Nos. 6 and 17. It 
does not seem .to agree with the general principle "The account 
which receives is debtor to the account which gives." The fact is 
that "interest paid" means that cash (or other value or credit) is 
given on account of interest, therefore Cash is credited and Interest, 
which is an expense, is charged. "Interest received" means that 
cash is received on account of interest, therefore Cash is charged, 
and Interest, which in this case is revenue or income, is credited. 

If we owe John Doe $1000 and settle his account by giving ^i"^ a 
three-months' note for $1015, the e^try is. 

John Doe $1000 To Bills Payable $1015 

Interest 15 

If John Doe owes us $1000 and he gives us a note for $1015 in 
pasrment the entry is 

Bills Receivable, $1015 To John Doe, $1000 

To Interest 15 



39 


Rent 


71 


25 






44 


To Rent Income 






71 


25 


42 


Interest 


19 


23 






17 


To Accrued Interest Payable 




1 


19 


23 


6 


Accrued Interest Receivable 





71 






42 


To Interest 









71 


37 


Losses from Bad Debts 


33 


56 






4 


To Reserve for Losses from Bad Debts 


^' 


33 


56 


31 


Accounts Receivable 


3358 


31 






23 


To Sales 






3358 


31 


24 


Sales Allowances 


2 


00 






3 


To Accounts Receivable 






2 


00 


40 


Trading Account To Sundries 


2761 


67 






24 


To Mdse. (Cost of Sales) 






2759 


67 


25 


To Sales Allowances 


1 




2 


00 


23 


Sales 


4659 


96 






40 


To Trading Account 






4659 


% 


41 


Profit & Loss To Sundries 


804 


66 






26 


To Salaries and Wages, Buying 






25 


00 


28 


To Salaries and Wages, Selling 






177 


33 


31 


To Salaries and Wages, Delivery 






102 


67 


33 


To Management and OfiSce Salaries 






269 


00 


29 


To Advertising 






30 


00 


27 


To Misc. Buying Expenses 






14 


00 


30 


To Misc. Selling Expenses 






3 


75 


32 


To Misc. Delivery Expense 






8 


08 . 


34 


To Office Supplies and Exp. 






22 


03 


35 


To Insurance on S. & S. Equip. 






1 


61 


36 


To Taxes on S. A S. Equip. 






2 


50 


37 


To Losses from Bad Debts 






33 


56 


38 


To Misc. Gen Expense 






26 


79 


39 


To Rent 






71 


25 


42 


To Interest 






17 


09 


41 


Sundries To Profit & Loss 






1381 


33 


40 


Trading Account 


1356 


26 






43 


Cash Dbcounts 


6 


55 






44 


Rent Income 


16 


52 






45 


Misc. Outside Income 


2 


00 






41 


Profit & Loss 


576 


67 






22 


To Proprietor's Capital Account 






576 


67 







Ledger 

Cash 






To Bal. 
To Sundries 


990 
1311 


94 
63 


* 
By Sunds., 
By Bed. 


690 

1611 


90 

67 




2302 


" 


2302 


57 



2. Notes Receivable 



To Bal. 



"I ! 'I 

!! 191 84 'I 



4. Reserve for Bad Debts 



By Losses from B. D. 





3. .Accts. 


Receivable 






To Bal. 
To Sales 


162 
3358 


50 
31 


By Sales Allowances 
By BaL. 


2 

3618 


00 
81 




3520 


81 


3520 


81 



33 



56 



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26 



BOOKKEEPING AND COST ACCOUNTING 



Ledger — {CorUiniied) 
5. Prepaid Insurance 



To Cash 



109 



24 



By Sunds. 
By Bal 



9 

too 



6. Accrued Interest Rec. 



To Interest 



Ml II 



71 



7. Store Property 



To Bal. 



4500 00 



8. Warehouse Property 



To Bal. 



1975 00 



9. Reserve for Depreciation on Store and Warehouse 



To Bal. 



To Bal. 



To Bal. 



By Rent Income 



10. Store Equipment 



272 



II. OfiScc Equipment 



74 



37 



12. Delivery Equipment 



396 



67 



13. Notes Payable — Trade Creditors 



By Bal. 



14. Notes Payable — Banks 



17. Accrued Interest Payable 



By Interest 



26 



1210 



10 



98 



50 



• 




By Bal. 


900 


00 


15. 


Accts. Pay.— Trade Creditois 






To Bal. 


9685 


79 


By Bal. 

By Sundries i 


896 
2789 


05 
67 


16. Accts. Pay— Others 








j By Bal. 


485 


00 



19 23 



18. Salaries and Wages 


To Cash 
To Bal. 


492 

82 


00 

00 


By Sundries 


574 


00 


19. Accrued Taxes 








By Sundries 


7 


75 



20. Proprietor's Drawing Account (no entries) 
21. Mortgage Payable, Warehouse 









By Bal. 


1250 


00 


22. Proprietor's Capital Acct. 


To Bat. 


7860 


U 


By Bal. 
P. & L. 


7273 
576 


57 
67 


23. Sales 


To Trading a/c n 4659 

1 

,1 


96 


1 
By Accts. Rec. 
By Cash 


3358 
1301 


31 
65 


24. Sales Allowances 


To Accts. Rec. 


2 


00 


By Trading a/c 


1 

2 I 00 

1 1 


25. Merchandise Purchases 


To Accto. Pay; 


2759 


67 


By Trading a/c 


2759 


67 


26. Salaries and Wages. Buying 


To Accrued 8. <fe W. 


25 


00 


By Profit A L. 


25 00 


27. Miflcellaneous BuvinR Expen.«<cfl 


To Cash 


14 

1 


00 


By P. A L. 


14 


00 


28. Salaries and Wages. Selling 


To Accrued S. A W. 


177 


33 


By P. A L. 

1 


177 "i 33 


29. Advertirting 


To Accts. Pay. 


30 


00 


By P. & L. i 

1 


30 00 


30. Miflcellanoous Soiling Expenses 


To Cash 


3 


75 


By P. & h. 


3 


75 


3 1 . Salaries and Wages, Delivery 


To Accrued S. & W. 


102 


67 


By P. A L. 


102 


67 


32. Miscellaneous Delivery Expense 


To Caah 


8 

1 


08 


By P. A L. 


8 


08 


33. Management and OflBcc Salaries 


To Accrued S. & W. 


1 

1 269 

1 


00 


1 
By P. A h. 


269 


00 


34. Office Supplies and Expense 


To Cash 


22 03 


By Profit A L. 


22 


03 


35. Insurance on Stock and Store Ekiuip. 


To Prepaid Ins. 


1 


61 


1 
By Profit A L. 


' 


61 


36. Taxes on Stock and Store Equip. 


To Accrued Taxes 


2 


50 


By Profit A L. 


2 


50 



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ACCOUNTS FOR RETAIL MERCHANTS. SELLING PRICES. TURNOVER 
Ledger — (Coniinued) 42. interest 

37. Losses from Bad Debts 



27 



1 
To Reserve for B. D. 


33 


56 


! 
By Profit A L. 


33 


56 


38. Misc. General Expense 


To Cash 

1 


^. 


79 


1 
By Profit A L. < 


I 

26 


79 


39. Rent 


To Rent Income 


71 


23 


By Profit & L. 


71 


25 


40. Trading Acct. 



To Acer. 


Int. 


Pay. 


19 


23 


By Ac. Int. 
By Cash 
By P. A L. 


R«o. 




I 
17 


71 
43 
09 



43. Cash Discounts on Purchases 




79 To Profit A L, 



44. Rent Income 



To Bal. (Inventory) 
To Mdse. Purchases 
To Sales Allowances 
To Profit A L. 



3451 


09 


2759 


67 


2 


00 


1356 


26 


7569 


02 



By Sales 

By Bal. (Jnventory) 



4659 

2909 



7569 



% 

oe 



To Acer. Taxes 


5 


25 


By Rent 


71 


25 


To Prepaid Ins. 


7 


49 








To Depn. S. A W. 


26 


98 








To Cash 


15 


01 








To Profit A L. 


16 


52 




1 






71 


25 j 

1 





Miscellaneous Outside Income 



02 




41. Profit and Loss 



To Sundries 
To Prop. 



804 
576 




33 



From this ledger the Balance Sheet may be made as below, 
showing the transactions during the month as well as the 
balances at the end of the month. A sheet of this form with 
thirteen double columns would show the whole course of the 
business each month for six months. 



BALANCE SHEET 







Tbial Balance, 
Jam. 1 




Transactions, 
Januabt 




Trial Balance, 
Jan. 31 






Dr. 

1 


Cr. 


Dr. 


Cr. 


Dr. 


Cr. 


1 


Cash 


990 


94 






1,311 


63 


690 


90 


1.611 


67 






2 


Notes Rec. 


191 


84 














191 


84 






3 


Accta. Rec. 


162 


50 






3.358 


31 


2 


00 


3.518 


81 






4 


Res. for Bad Debta 














33 


56 






33 


56 


5 


Prepaid Ins. 










109 


24 


9 


10 


100 


14 






6 


Accrued Int. Rec. 













71 









71 






7. 8. 10-12 


Real Est. A E. 


7.218 


75 














7,218 


75 






9 


Res. for Dep'n. 


_ 












26 


98 






26 


98 


13 


Notes Pay. Trade 






1,210 


50 














1.210 


50 


14 


Notes Pay. Banks 






900 


00 














900 


00 


15 


Accts. Pay. Trade 






896 


05 






2.789 


67 






3.685 


72 


16 


.^ccts. Pay. others 






485 


00 














485 


00 


17 


Accrued Int. Pay. 














19 


23 






19 


23 


18 


Accrued Sal. A Wages 










492 


00 


574 


00 






82 


00 


19 


Accrued Taxes 














7 


75 






7 


75 


21 


Mortgage Payable 






1,250 


00 














1.250 


00 


22 


Proprietor 






7.273 


57 






576 


67 






7,850 


24 


23 


Sales 










4,659 


% 


4,659 


96 










24 


Sales Allowances 










2 


00 


2 


00 










25 


Mdse. Purohasee 










2,759 


67 


2.759 


67 


2.909 


06 






26-27 


Buying Exp. 










39 


00 














2^-29-30 


Selling Exp. 










211 


08 














^1-32 


DeUvery Exp. 










110 


75 














33-34 


Office Exp. 










291 


03 


787 


57 










35-36 


Ins. A Tax on Store Equip. 










4 


11 












37 


Losses from Bad Debts 










33 


56 














38 


Misc. Gen. Exp. 










26 


7) 














39 


Rent 










71 


25 














40 


Trading Acct. 


3,451 


09 






4.117 


93 


4,659 


96 


2,909 


06 






41 


Profit A Loss 










1.381 


33 


1.381 


33 










42 


Interest 










19 


23 


19 


23 










43 


Cash Discts. 










6 


55 


6 


55 










44 


Rent Income 










71 


25 


71 


25 










45 


Misc. Outside Income 










2 


00 


2 


00 












12.015 


.2 


12.015 


12 


19.079 


38 


19.079 


38 


15.550 


98 


15.550 


98 



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28 



BOOKKEEPING AND COST ACCOUNTING 



Suggested Improvements of the Trade Commissioii's 
System 

The system described by the Commission is an excellent 
illustration of the later elaborated methods of the old school of 
accountants, and it should be clearly understood by students 
before they proceed to modern methods in which much of the 
clerical labor required by the older methods is dispensed with. 

The system is open to the objection that it violates the 
principle laid down b}' the Commission: 

"The best system ot accounts for any business is one which 
furnishes the information required with the least effort." 
Instead of its being "the least involved system which will 
give the information essential to successful management," it 
is a highly involved one, requiring much more labor to keep 
it than is needed with other sj'stems. 

It has 45 accounts, 14 of which, Nos. 26 to 39 inclusive, 
are subdivisions of expense, and are carried through all the 
routine. of journal, double-entry ledger, balance sheet, profit 
and loss statement, and monthly summary. Instead of 
having a single Real Estate and Equipment Account, the 
Bubdivisioas of it being entered once a year in certain columns 
of an Inventorj'^ Book, there are five separate accounts. It 
has two accounts for Notes Payable, one for banks the other 
for trade creditors. If there is any necessity for separating 
the two kinds of notes, they may be marked with the letters 
B or T in the Notes Payable Book. The same may be said 
of the two Accounts Payable, "trade creditors" and "others." 
Many of the accounts show, not actual business transactions, 
but fictitious or imaginary transactions, or accruing expense 
liabilities which there is no need of entering in the general 
ledger until they are paid. If there is need to have these 
liabilities taken into account in order to avoid inaccuracy in 
Profit and Loss statements, they can be entered in a memo- 
randum "Profit and Loss Adjustment" at the bottom of 
each monthly balance sheet. The accounts referred to are: 
Reserve for Bad Debts; Losses from Bad Debts (not actual 
losses but merely a monthly charge to an expense account, 
offsetting the monthly credit to the Reserve account) ; Reserve 
for Depreciation on Store and Warehouse, the monthly 
credit of which is charged to another expense account; 
Rent and Rent Income, both of which are accounts of imag- 
inary transactions, the buildings being owned and not rented. 

Instead of using a single Merchandise account, as in older 
and simpler systems, it is divided into five accounts: Mer- 
chandise Purchases; Cash Discounts on Merchandise Pur* 
chases; Sales; Sales Allowances; and Trading Account. In 
the old systems Merchandise Account would appear as follows 
in the Ledger: 

Mdse. 



Merchandise Purchases 



To Bal. (Invty.) 
To Accts. Red. (A) 
To Accts. Pay. 
To Profit A Loss 


3451 

2 

2759 

1362 


09 
00 
67 
81 


By Cash 
By Cash (D) 
By Accts. Rec. 
By Bal. (Invty.) 


1301 

6 

3358 

2909 


65 
55 
31 
06 




7575 


57 


7575 


57 


To Bal. 


2909 


06 





To Accts. Pay. 


2759 


67 


By Trading Aoot. 


2759 


67 




1 








Cash Discounts on Mdse. Purchases 


To Profit and Loss 


6 


55 


By Cash 


6 


55 








■ 




Sales 


To Trading Acct. 


4659 


96 


By Cash 

By AccU. Rec. 

1 


1301 
3358 


65 
31 




4659 


96 


4659 


96 









Sales Allowances 


To Accts. Rec'l 


' 


00 


By Trading Acct. 


.1 


00 








1 1 


Trading Account 


To Bal. (Invty.) 
To Mdse. Purchases 
To Sales Allowances 
To Piofit & Loss 


3451 

2759 

2 

1356 


09 
67 
00 
26 


By Sales 

By Bal. (Invty.) 


1 
4659 
2909 


96 
06 




7569 

1 


02 


7569 


02 




1 





In these five accounts there are fifteen entries, while in the 
single merchandise account there are only eight. The fi^^ 
accounts give not a scrap more of information than the single 
aecount. 

In the Profit and Loss Statement the "Net Cost of Goods 
Sold " is given, erroneously, as $3301.70 in the following 
statement : 



Inventory at beginning 
Purchase at Cost 


3062 
153 


17 
11 


3451 
2759 


09 
67 


6210 
2909 


76 


Deduct Invty. at closing 
Less Stock Depreciation 




1 


06 


Net Cost of Goods Sold 






3301 


70 



The depreciation of 5 per cent, or S153.ll on the goods 
remaining unsold is thus made to increase the cost of the 
goods sold. 

A more correct statement would be the following: 



Inventory at beginning 
Purchase, at Cost 


3451 
2759 


09 
67 


6210 
3062 


76 


Inventory at closing, at cost value 






17 


Net cost of Goods Sold 


3I4« 


59 



The Profit and Loss Statement would then read as below: 



Sales, less Sales Allowances 
Cost of Goods Sold 


4657 
3I4« 


96 
59 


Profit on Sales 
Deduct Depreciation on goods unsold 


1509 
153 


37 

11 


Gross Profit on Trading 


1356 , 26 



(A) Sales Allowances. (D) Cash Discounts on Purchases. 

By the Commission's system the same transactions would 
be recorded as follows: 



The first improvement to be made in the Trade Commis- 
sion's system is to consolidate some of the fourteen expense 
accounts so as to reduce their number. The "Monthly 
Expense Ledger," see page 31, reduces them to eight. The 
next is to consohdate the five property and equipment ac- 



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ACCOUNTS FOR RETAIL MERCHANTS. SELLING PRICES. TURNOVER 



29 



counts into one Real Estate and Equipment Account, letting 
the subdivisions remain in the Inventory Book. The 44 
accounts of the original Balance Sheet are thus reduced to 34, 
as shown in the improved Balance Sheet on page 27, in 
which the monthly transactions are given as well as the bal- 
ances at the beginning and end of the month. 

A further step is to consolidate the eight expense accounts 
of this balance sheet into one Expense Account in the General 
Ledger, taking the footing of the last column of the Monthly 
Expense Ledger, $787.57, as the debit to Expense Account, 
balancing the eight credit accounts whose titles are given in 
the headings of the columns, the amounts being in the bottom 
line. By this means the number of accounts is reduced to 27. 

The next stage in reducing the labor of keeping the accounts 
is the abandonment of the old-fashioned Journal and Ledger 
and the adoption of the Column Ledger, or Monthly Combined 
Journal-Ledger, with printed titles of the accounts, shown on 
page 31. For a description of this Ledger, see page 17. 

One page of this Ledger is used for each month. The 
footings of the columns (Total Debits) and the totals of the 
horizontal lines (Total Credits) are transferred to the Dr. 
and Cr. columns of Transactions in the Balance Sheet, the 
titles of accounts in which are also printed. One sheet will 
last six months, showing a complete record of the total trans- 
actions of each account for each month if the sheet is made 
with thirteen double colunms (Dr. and Cr.) seven of them 
being for balances and six for transactions. 

In making entries in the monthly Expense Ledger and in 
Combined Journal-Ledger the figures are obtained from the 
footings of the columns of the books of original entry, Cash 
Book, Petty Cash Book, Bill Book (or Notes Receivable and 
Notes Payable), Invoice Register, Sales Book (or Sales Ticket 
Record), just as in making the entries in an ordinary journal. 

In ordinary bookkeeping methods the total monthly pur- 
chases of merchandise, as shown in the Invoice Register or 
Accounts Payable book, would be journalized in the entry 
Mdse. To Accounts Payable $2759.67; $2759.67, and the 
entry would be posted to two accounts in the Ledger. In 
the Combined Journal-Ledger System the entry is made 
both as a journal entry and as a ledger entry at the same time 
by a sin^e writing of the amount $2759.67 in the vertical 
colunm with the printed heading "Mdse.," on the horizontal 
line having the printed title " Accts. Payable." 

Comparing the amount of labor required to enter the figures 
in the Expense Ledger and the Journal Ledger with the old 
method of writing the entries in the Journal and then posting 
them in the Ledger, we have the following: 



Entries of figures in the Expense Ledger 

Entries of figures in the Journal-Ledger 


70 
70 


18 
28 


Total 

Items wnttfln in the JmirnRl . . . r 


46 


Items Posted in the Ledger 








Total 


140 





There are 18 journal entries comprising the 70 items, and 
postings are made on 29 of the ledger pages. In making a 
trial balance all the 45 accounts in the ledger have to be 
examined and their balances written down. The Journal- 
Ledger is self-balancing, if the columns and horizontal lines 
are correctly added. 

In the Monthly Expense Ledger and Journal-Ledger 
here shown not a single transaction entered in the old- 
style journal has been omitted. Such entries, for example, 
as Salaries and Wages, Buying Expense To Accrued Salaries 
and Wages, $25.00, and Profit and Loss To Salaries and Wages, 
Buying Expense, all appear in the one entry $25.00 in the Ex- 
pense Ledger, the transfer to Profit and Loss being taken care 
of in the credit of $787.57 to Expense in the Journal Ledger. 

The Expense Ledger and the Journal Ledger may be 
greatly improved and reduced in bulk by removing from 
them the following accounts: 







Dr. 


Cr. 


1 
4 Reserve for Bad Debts 






33 


56 


5 Prepaid Insurance 


109 


24 


9 


10 


6 Accrued Interest Receivable 





71 






9 


Reserve for Depreciation of Store and 












Warehouse 






26 


98 


17 


Accrued Interest Payable 






19 


23 


19 


Accrued Taxes 






7 


75 


24 


Sales Allowances 


2 


00 


2 


00 


37 


Losses and Bad Debto 


33 


56 


33 


56 


40 


Trading Account 


4659 


% 


4659 


96 


43 


Cash Discounts on Purchases 


6 


55 


6 


55 


44 


Rent Income 


71 


25 


71 


25 


45 


Miscellaneous Outside Income 
Unbalanced Accounts 


2 


00 


2 


00 




4883 


27 


4871 


94 




100 


85 


87 


52 




Profit & Loss Adjustment for Accts. re- 












moved from Ledger 






13 


33 









The reasons for taking Sales, Sales Allowances, Cash Dis- 
counts on Merchandise Purchases, and Trading Account out 
of the Ledger and including them all in Mdse. Account have 
already been given, but they may be repeated here in a dif- 
ferent form: 



Transactions 



(1) 


Inventory at beginning 


1 3451 


09 


(5) 


Sell goods on Credit 


3358 


31 


(2) 


Purchase goods on account 


2759 


67 


(6) 


Make allowance on invoice 


2 


00 


(3) 


Receive Cash Discount 


1 6 


55 


(7) 


Inventory, final, 3062.17 less depn 153. II 


2909 


06 


(4) 


Sell goods for Cash 


1301 


65 


1 









Journal Entries on the Commission's System 





Original 








Transfer and Balancing 






(1) 


Mdse. Inventory 


3451 


09 










(2) 


Mdse. To Accts. Pay. 


2759 


67 


(3) 


Cash Discts. To Profit ft Loss 


6 


55 


(3) 


Cash To Cash Discts. 


6 


55 


(4) (5) 


Sales To Trading Acct. 


4659 


96 


(4) 


Cash To Sales 


1301 


65 


(6) 


Trading Acct. To Sales Allow. 


2 


00 


(5) 


Accts. Rec'l. To Sales 


3358 


31 




Trading Aoct. To Mdse. (** Net Cost") 


2759 


67 


(6) 


Sales Allow. To Accts. Rec. 


2 


00 




Trading Acct. To Profit A Loss 


1356 


26 


(7) 


Cr. by Inventory 


2909 


06 











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30 



BOOKKEEPING AND COST ACCOUNTING 



In the ordinary systems the same seven original entries 
would be made, but "Mdse." would be used in all instead of 
Sales, Sales Allowances and Cash Discounts; but only one 
transfer double-entry would be needed, instead of five, viz., 
Mdse. To Profit and Loss, S1362.81 ; the four Trading account 
double entries, or eight ledger postings, being eliminated. 
The increased complexity due to having these extra accounts 
in the ledger, with no compensating advantages, is a good 
reason for their exclusion from the ledger. 

Reserve for Bad Debts and Reserve for Depreciation on 
Store and Warehouse may just as well be left out of the Ledger 
and taken care of by a Profit and Loss adjustment statement 
appended to the Balance Sheet. In the Commission's sys- 
tem these reserve accounts are handled as follows: 

4. Reserve for Bad Debts: Credit with an estimated amount, 
based on charge sales, sufficient to provide for losses. Charge 
with the balances of personal accounts when hope of collection 
is abandoned. 

37. Losses from Bad Debte: Charge with the amount that has 
been reserved for Bad Debts (4). 

9. Reserve for Depreciation on Store and Warehouse: Credit 
this account with the amount of depreciation on store and ware- 
house and charge the amount to Rent Income (No. 44). 



The Journal entries are: 
Losses from Bad Debts To 
Profit & Loss To 



Reserve for Losses from Bad Debtsl 
Losses from Bad Debts. 



33.56 
33.56 



Rent Income 


To 


Reserve for Dep'n on S. A W. 


26.98 


Rent 


To 


Rent Income 


71.25 


Profit & Loss 


To 


Rent 


71.25 



The result is to decrease the credit balance of Profit and 
Loss account by S33.56 plus $26.98 and put these amounts to 
the credit of the two Reserve Accounts. The same result 
can be accomplished, for all practical purposes, with less book- 
keeping, by leaving these accounts out of the ledger, and 
making a statement concerning them in the Balance Sheet. 

The pamphlet of the Commission says: "No merchant 
can be said to be managing his business properly unless 
adequate provision is made for depreciation." 

Adequate provision for depreciation consists first in selling 
the goods at such an advance over cost and expenses that a 
surplus may be built up, out of which depreciation, when it 
takes place, may be provided for, and second, in not distrib- 
uting this siu-plus in the form of dividends to such an extent 
as will deplete it below a proper reserve for depreciation. 
Whether or not the portion of this surplus that is kept as a 
reserve is credited to a reserve account in the Ledger or is 
kept in a surplus or Profit and Loss account is merely a matter 
of bookkeeping. The financial condition of the business, 
which a bank may consider as a basis for a loan, is precisely 
the same if the surplus account has a credit balance of 15000, 
with no reserve for depreciation, or if the credit balance is 
$4000 with $1000 credited to a reserve account. 

There is, however, an important advantage in putting part 
of the surplus into a reserve account; a surplus is popularly 
supposed to be something that ultimately may be divided 
among the stockholders, while a reserve is a fund that will 
some day be wiped out by actual depreciation of assets. If it 
is kept as a reserve, stockholders will not expect it to be 
paid out in dividends. 



Taxes and insurance appear in the following Journal 
entries: 



Prepaid Insurance To Cash 

Insurance on Stock and Store Equipment To Prepaid Insurance 

Rent Income, Insurance To Prepaid Insurance 



Taxes on Stock and Store Equipment 
Rent Income 



To Accrued Taxes 
To Accrued Taxes 



109 


24 


» 


61 


7 


49 


9 


10 


2 


50 


5 


25 



75 



If the Insurance premium $109.24 was paid in advance for a 
year, and $9.10 of it is charged in the expenses for Januar>% the 
balance on January 31, $100.14, is an expense asset which is 
decreasing every day. Instead of keeping the three accounts, 
Prepaid Insurance, Insurance on Stock and Store Equipment, 
and Rent Income, open on the Ledger, the amount of $100.14 
may be entered as an expense asset and the items SI. 61 and 
7.49 as incurred or accrued expenses in a memorandum 
Profit and Loss adjustment. In the same way this Adjust- 
ment may contain Accrued Taxes $7.75 as an expense liability 
incurred and the items $2.50 and $5.25 as incurred expenses. 

Accrued Interest Payable, $19.23, and Accrued Intere^t 
Receivable, $0.71, may also be put in the Profit and Loss 
Adjustment, the first as a liability or credit, the second as a 
debit, or asset. Miscellaneous Outside Income, $2.00, re- 
ceived for use of the telephone in the store, may be treated 
as income from Expense Account, offsetting to that amount 
the rent of the telephone. 

By removing all these accounts from the Ledger, Profit 
and Loss Adjustment will be as follows: 



1 


1 


Pbofit & Losa 
. Adjustukmt. 








1 


Dr. 

(Liability) 


Cr. 

(Asset) 


Insurance 

Taxes 

Reserve for Bad Debts 

Reserve for Depreciation 

Accrued Int. Rec. 

Accrued Int. Pay. 


1 

9 

1 ,1 

26 

19 


1 
10 
75 
56 
98 

23 


109 



24 
71 


Balance, Deferred Credit to Profit 
and Loss 


! 




% 
13 


62 
33 


109 


95 










1 





The result of removing all these accounts from the Ledgei 
is shown on page 32. 

Here on one page is the whole record of every essential 
fact of the month's business that is shown in the Commis- 
sion's system of 45 ledger accounts, 18 journal entries with 
70 items, monthly summary, profit and loss statement, and 
balance sheet. The only items missing are the five separate 
accounts which are here condensed into one Real Estate 
and Equipment Account, and Trading Account. There are 
only 13 accounts in the combined Journal-Ledger and 10 in 



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ACCOUNTS FOR RETAIL MERCHANTS. SELLING PRICES. TURNOVER 



31 



the Expense Distribution, and 7 items in the Deferred Profit 
and Loss Charges and Credits. There are only 15 entries 
in the Joiunal-Ledger and 12 in the Expense Distribution, a 
total of 27, figures only, as compared with 140 items, writing 
and figures, in the Commission's system. 

Twelve sheets with proper rulings and printed headings in 
this system contain the record of a whole year's business in 
sufficient detail for the manager's or owner's needs as far as 
the general course of the business is concerned. If minor 
details are wanted for any purpose the bookkeeper can easily 
supply them by reference to the books of original entry from 
the footings of which the Journal-Ledger entries were made. 
The student is advised to make a thorough and sys- 
tematic study of this chapter. He should provide himself 
with blank books with journal and ledger rulings, and after 



first journalizing and then posting the assets and liabilities, 
as shown in the Trial Balance of January 1, he should 
journalize the transactions, as in the journal entries on 
page 25, verifying the transfer and profit and loss entries, 
and post the entries into his ledger. A trial balance of the 
ledger should then be made, and when it is found to bal- 
ance, the Monthly Summary of Business, Balan*be Sheet and 
Profit and Loss Statement, January 31, should be derived 
from the ledger and put into the forms given by the Trade 
Commission. The student should then study carefully the 
" suggested improvements," page 28, and repeat the work, 
using the combined journal-ledger system, and obtain the 
final results in the forms given on page 32. He will thus be 
enabled to satisfy himself as to the advantages of the new 
system. 



Monthly Ezpemsjb Ledger 



















Credit Accounts 
















Charge Accounts 


1 
Cash 


15 

Accts. 
Payable 


18 

Wages and 
Salariei 


5 
Prepaid 
Insurance 


19 

Acciued 
Taxes 


37 

Res. for 

Bad Debts 


9 

Res. for 
Dep'n. 


41 

Profit 
and Loss 


Total 
Expense 
Charges 


26, 27 


Buying £xp 


14 

3 

8 

22 


00 
75 
08 
03 






25 
177 
102 
269 


00 
33 
67 
00 












1 










39 
211 

no 

291 

4 


00 


28. 29, 30 
31, 32 


Sellinff £xD 


30 


00 




















08 


Delivery Ezp 






















75 


33 34 


Office Exp 


























03 


35, 36 


Tax. and Ins. on Equip. 
Loes from Bad Debts.. 

Misc. Gen. Exp 

Rent Income 






1 


61 


2 


50 














11 


37 














33 


56 










33 56 


38 


26 

15 


79 
01 


























26 
71 


79 


44 










7 


49 


5 


25 






26 


98 


16 


52 


25 




Total Credits 


















89 


66 


30 


00 

I 


574 


00 


9 


10 


7 


75 


33 


56 


26 


98 


16 


52 


787 


57 



Monthly Combined Journal-Ledqeb 







Chaboe Accounts 


Credit Accts.* 


1 


1 

< 

3 


s 

5 


6 


23 


1 

< 

1 

24 


1 

25 


26-33 


27-39 


H 
40 


a 
42 


43 


o 

a 

d 
.s 

;^ 

45 


h 

40 


as 

1 

o 


1 


Cash 










109 


24 


















492 


00 


89 


66 

56 
10 
98 
00 

75 






















690 

2 

33 

9 

26 

2789 

19 

7 

576 

4659 

2 

2759 

574 

787 

4659 

19 

6 

2 

1381 

19008 


90 


3 


Accts. Rec'l . . . 


















2 


00 


























00 


4 


Res. for B. D. . 






























33 

9 

26 

30 






















56 


5 


Prepd. Ins 






















































10 


9 


Depn. S. A W . 
Accts. Pay 






















































98 


15 


























2759 


67 


























67 


17 


Acct. Int. Pay. 
Acer. Taxes . . . 






























W 


23 














73 


19 


































7 














75 


22 


Proprietor. .... 


















































576 


67 


67 


23 


Sales 


1301 


65 


3358 
















































96 


24 


Sales Allow.... 
































00 
67 


















00 


25 


Mdse. Purchd.. 






































2759 


















67 


26-33 


Salaries ft W.. 


































574 


00 


















00 


27-39 


Expense 
















































787 


57 


57 


40 


Trading Acct . . 


















4659 


96 


































96 


42 


Interest 

Cash Discts... . 
Misc. Out. Inc. 


1 

6 
2 


43 
55 
00 













71 


































17 


09 


?3 


43 














































55 


45 






















































00 


41 






























16 


52 


1356 


26 




23 


6 
6 


55 
55 


2 
2 


00 
00 


1381 


33 


33 




Total Debits. 


1311 


63 


3358 


31 


109 


24 





71 


4659 


% 


2 


00 


2759 


67 


492 


00 






787 


57 


4117 


93 


19 


13 



* The titles of debit accounts may be put in this column and the titles of credit accounts at the head of the columns of figures if desired. 



Digitized by 



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32 



BOOKKEEPING AND COST ACCOUNTING 



The Condensed Accounting System 

COHBIKCD JoUBNiLI/-L>DaBB, JaMUART, 1916 







Credit Account* 


* Charge Acoountfl 


ja 

s 

1 


2 


i 

• 
< 

3 


1 

o 
Z 

5 


6 


1 

i-' 

7 


1 
9 


1 

10 


c 
II 


12 


u 

S 

A* 
13 


IS 

a 


1 


Cash 


























1308 


20 


2 


00 


1 


43 










1311 


f>3 


2 


Notes Rec'l 




































3 


Accts. Rec'l 

Notes Pay 


























3358 


31 


















3385 


31 


5 












































6 


Accts. Pay 


















































7 


Sal. and Wages 


492 


00 










































492 
4124 

802 

1 

1364 


00 


9 


Mdse 






2 


00 






2759 67 
30 00 


















1362 


81 






4A 


10 


Expense 


196 


90 






574 


00 














90 


II 


Interest 


























1 


43 


563 


34 


43 


12 


Profit A Loss 






























800 


90 






74 


13 


Proprietor 










































(Other Accts.; 




















































Total Credits 


690 


90 




— 


2 


00 





— 


2789 


6/ 


574 


00 


4666 


51 


802 


90 


1 


43 
















1364 


24 


563 


34 


11454 


99 









Balance Shkbt 





1 
1 


Jan. I 1 


TRANSACnONB 


1 


1 
1 


jAh 


. 31 






Dr. 


Cr. 


Dr. 


Cr. 


Dr. 


Cr. 


1 


Cash 


990 

191 

162 

7.218 


94 
84 
50 
75 






1,311 


63 


690 


90 


1,611 

191 

3.5 f8 

7,218 


67 
84 
81 
75 








Notes Rec'l 












Accts. Rec'l 






3,358 


31 


2 


00 








Real Estate & Equip 






2 J 10 

4.170 

82 

1.250 






Notes Payable 


2.110 
1.381 


50 
05 










50 




Accounts Payable 










2,789 
574 


67 
00 






77 




Salaries and Wages 






492 


00 






00 




Mortgage Payable 






1,250 


00 






no 




Merchandise 


3,451 


09 


4.124 

802 

1 

1.364 


48 
90 
43 
24 


4.666 

802 

1 

1.364 
563 


51 
90 
43 
24 
34 


2.909 


06 




10 


Expense 










II 


Interest 


















12 


Profit & Loss 


















13 


Proprietor 






7,273 


57 






7.836 


91 








12 














12.015 


1 12,015 


12 


11.454 


99 


11.454 


99 


15.450 


13 


15.450 


13 





Expense 


Distribution 












Cash 


A/cs. Pay 


Sal.A Wages 


Total 


Buying Exp. 


14 


00 






25 


00 


39 


00 


Selling Exp. 


3 


75 


30 


00 


177 


33 


211 


08 


Delivery Exp. 


8 


08 






102 


67 


no 


75 


Office Exp. 


22 


03 






269 


00 


291 


03 


Miscel. Exp. 


26 


79 










26 


79 


Repairs 


15 


01 










15 


01 


Insurance 


109 


24 










109 


24 


ToUl 


198 


90 


30 


oo| 


574 


00 


802 


90 



Deferred Profit A Loss Items 



Cr. Prepaid Ins. Charged to Expense 
Less Insurance Accrued 
(Bldgs. 7.49; Stock. 1.61) 


19 
7 

33 
26 


23 
75 

56 
98 


109 
9 


24 

10 


Accrued Int. Reo. 


100 



14 
71 


Dr. Ace. Int. Pay. 
Ace. Taxes 

(Bldgs.. 5.25; Stock, 2.50) 
Res. for Bad Debts 
Res. for Dep'n. 


100 
87 


85 
52 


Bal. to Cr. of P. A L. 






13 


33 



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ACCOUNTS FOR RETAIL MERCHANTS. SELLING PRICES. TURNOVER 



33 



MERCHANTS' SELLING PRICE 

A merchant in order to price his goods properly must know his 
overhead expenses. With a proper arrangement of his accounts 
the percentage of overhead mt*y be readily obtained. Goods not 
priced high enough to cover this percentage are actually sold at a 
loss. The most convenient way of arriving at the proper per- 
centage to add to the first cost of goods for overhead is to use 
the average ratio of operating expenses to net sales covering a 
past period. For instance, if a merchant's annual sales for the 
last fiscal year were $25,000 and the expense of conducting his 
business was $5000 his overhead was 20 per cent. By adding 
the desired percentage of profit on sales to this overhead per- 
centage and deducting from 100 gives the percentage of invoice 
cost to selling price. The invoice cost of an article divided by 
this percentage gives the selling price. (Federal Trade Com- 
mission's Pamphlet, p. 6.) 

The system above described for fixing selling prices is 
rarely, if ever, used in actual business, and in any business 
dealing with a large variety of goods it is practically impos- 
sible. The statement that "goods not priced high enough to 
cover the percentage (of overhead) are actually sold at a 
loss " may be far from true. 

Suppose that a month's business of a certain grocery store 
showed the following results: 





Invoice 


SellinoPrice 


Grobs Profit 


Turn- 


Sold 


Coat 
per lb. 


Amt. 


Per lb. 


Amt. 


Per lb. 


Amt. 


% 


over 

of 
Gooda 


1000 IbB. Sugar 

200 lbs. Tea A 

too lbs. Tea B 

50 Iba. Tea C 


35 
40 
60 


150 
70 
40 
30 


5.5ff 

40 
50 
80 


155 

80 


0.5^ 

5 

10 
20 


15 

10 
10 
10 


10 
14.3 
25 
33 


24 

44 

12 

6 


1350 

Other gooda 
12150 




190 
1710 




lib 
2150 




35 
440 


I8.4ay 
25.7 




13500 total 




1900 




2375 




475 


25 


10 



Overhead. Rent, taxes, insurance, interest, proprietor's services, clerk 
hire, cartage, stationery, postage, shortage, heating, lighting, depreciation, 
per month, $300 > 1 5.8% of Invoice Cost. 

Net profit per month, $175. 

According to the statement quoted above the sugar and 
the tea A '^ are actually sold at a loss/' for the selling price is 
only 10 per cent and 14.3 per cent, respectively, above the 
first cost, while the average overhead on all the goods handled 
is 15.8 per cent. 

The fact is that it is not correct to consider the overhead as 
an amount which must be uniformly distributed over all the 
goods sold as a percentage on their cost. The only reason 
why overhead is distributed on a uniform percentage of value 
basis is that that is an easy way to do it. The actual relation 
between the overhead and the cost of goods is a variable one, 
depending on the cost of handling, which varies with the 
bulk, weight, depreciation, shortage, etc., and with the turn- 
over or rapidity with which the goods are sold. If the average 
amount of sugar purchased at one time is 500 lbs. and 1000 lbs. 
is sold per month the goods turnover is 24 times a year. If 
tea, C, is bought in 100-lb. lots and only 50 lbs. is sold per 
month its turnover is 6 times per year. The selling price of 



sugar has no necessary relation to the average overhead of 
15.8 per cent, for the overhead properly belonging to it may 
be only 5 per cent. The selling price of the sugar and the 
cheaper tea may be fixed very low because the turnover is 
rapid, because the depreciation and shortage are small, and, 
because it is advisable to have some goods sold at a small 
profit in order to attract customers to the store who may be 
induced to buy other classes of goods on which there is a 
large profit. 

Factory Cost and Selling Price. Many authors publish 
diagrams illustrating the following formulas: 

1. Cost of Material + Cost of Direct Labor « Prime Cost. 

2. Prime Cost + Departmental and General Expense = 
Factory Cost. 

3. Factory Cost+Selling Expense = Total Cost to Make 
and Sell. 

4. Total Cost to Make and Sell+Profit =Selling Price. 

These formulas for finding the selling price may be use- 
ful in some few lines of manufacturing business, but, in 
general, only the first two lines of them are of any value. 
The factory cost, or what it costs to make an article, 
can be determined from the factory cost records provided 
the burden, or departmental and general factory expense, is 
properly distributed, and in many cases it may be pre- 
determined, but the selling expense is generally such an 
uncertain quantity that both it and the profit (or loss) are 
not determinable until after the goods are sold and paid for. 
Much of the cost of selling an article this year was incurred 
and charged to selling expense last year, and much of this 
year's expenditures of the sales department will not result in 
sales until next year. The selling price is not always fixed 
by the manufacturer, it is more often fixed by competition, 
or by the purchaser. 







Costs 






Factory CosU 


Selling Costs 


Selling Price 


Profits or 
Losses 


Dipect Material l-,._^^. 
Direct Labor jP"°»«Cost 


Proportion of Fi- 


Gross, less 


(See below) 


nancial and Ad- 


Discounts 






ministration Costs 


and AUow- 




Indirect Material ] 






anoes » Net 




Indirect Labor 




Advertising 


Price 




Other Factory Exp. 










Proportion of Fi- 


Burden 


Branch offices 






nancial and Ad- 




Other selling ex- 






ministration 




penses 






Costs 











FORMULAS FOR PROFITS AND LOSSES 

Net Selling Prices - (Factory Cost+Selling Cost) = Profit. 

(Factory Cost -f-Selling Cost) -Net Selling Price »Loss. 

When the selling price is not fixed by the market after 
the goods are made, but is a matter of contract between 
maker and buyer, then the formula may be 

Factory Cost+Selling Cost+Profit -Selling Price. 

In many factories the Prime Cost only is determined for 
each it«m of product, Direct Labor + Material, and no attempt 



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34 



BOOKKEEPING AND COST ACCOUNTING 



is made to distribute the burden over the several products. 
Monthly totals of labor, material, and actual burden are 
kept. 

It is better to make no distribution than to distribute 
by a wrong method. 

TURNOVER 

The rapidity of the turnover is a very important element in 
conducting a retail business. It is obvious that an increase in 
turnover goes hand in hand with an increase in profit. A slow 
turnover may be due to poorly selected stock, to overstocking, 
or to an inefficient selling organization. No effort should be 
spared to increase the turnover to its maximum. To ascertain 
the turnover divide the cost of goods sold during the year by the 
cost of the average stock carried. (Federal Trade Commission's 
Pamphlet, p. 6.) 

The tiunover referred to in the above extract is only one 
kind of turnover, that of the goods handled. Another equally 
important turnover is that of capital invested. In the case 
of the sugar sold by the grocery store, if 1000 lbs. is sold each 
month and 500 lbs. is purchased every half month, the turn- 
over is 24 if we consider that 500 lbs. is turned over 24 times 
a year, and this is the usual method of computing goods turn- 



over, but according to the rule given in the pamphlet, as 
quoted above, we might figure that the average stock carried 
was half of a single purchase, or 250 lbs. (assuming that a 
new barrel could be obtained on the same day the old one was 
emptied) costing $12.50 and this divided into S600, the cost of 
the sugar sold during the year, gives a turnover of 48. 

The turnover of capital is an entirely different matter. If 
a grocer could buy a barrel of sugar for S25 spot cash and sell 
it in two weeks for $27.50, collecting all the money before he 
needed to buy another barrel, his cash capital invested in 
sugar would be $25, and if he sold 24 barrels a year, costing 
$600, his turnover of capital would be the same as the goods 
turnover, or 24 times. But if he gave his customers three 
months' credit on the average he would have invested in 
sugar and in customers' accounts for sugar $150, making the 
turnover only 4 times a year, and this figure would be still 
further reduced by reason of the additional capital required 
for equipment and for expenses. 

Quick Turnover. There is nothing so vitally important to the 
success of the business, in every direction, as the quickening of 
shop production and the possibility thus secured of making a 
quicker turnover of working capital invested. — C. U. Carpenter. 



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CHAPTER V 
FACTORY ACCOUNTING 



The first principle in modem factory accounting is that in 
the general books of the Company the operations of the fac- 
tory shall be treated as if they were those of a separate busi- 
ness, belonging to outside parties. An account may be opened 
in the general books called Factory Plant (or Real Estate and 
Equipment), representing the Company's investment in the 
land, buildings, machinery and other permanent equipment 
of the factory, and another account, which may be called 
Factory Operation (or Manufacturing Account), is used 
to record the transactions between the factory and the 
general office. This account is charged with cash sent to 
the factory, with bills paid by the general office on account of 
the factory, and with all charges properly made against 
the factory for interest on the total investment in it (which 
includes both the cost of the plant itself and that of its oper- 
ation) for insurance, taxes and depreciation, and for such 
portion of the salaries of general administrative officers as is 
rightly charged to the cost of operating the factory and not to 
the cost of the selling or financial departments. The monthly 
entries on the debit side of the Factory Operation Account 
will generally include the following: 

GENERAL BOOKS, FACTORY OPERATION ACCOUNT 

Dr. To Cash — for payroll and petty cash expenses. 

To Accounts Payable — ^for invoices of goods purchased. 
To Interest Earned, for interest on investment in factory. 
To Insurance and Taxes, for i^ of annual insurance and 

taxes. 
To Reserve for Depreciation, for ^ of estimated annual 

depreciation. 
To Administration Expenses, for proportion chargeable 

to factory. 

The account will be credited each month "By Mdse." 
for the value of the products shipped from the factory, 
and By Factory Plant for the value of any additions or 
"betterments" that have been made by the factory to 
the building or its equipment. 

What is the meaning of the word "value" in this connec- 
tion? The answer to this question involves all the difficulties 
of the theory and -practice of factory accounting and cost- 
keeping. For any particular business the method of fixing 
the value to be used in crediting the factory for its shipments 
of goods should be determined at a conference between the 
management and the chief accountant. Whatever method 
be adopted it should be adhered to until very important 
reasons are found for changing it. 

The "value" to be credited may be either "factory cost" or 
"cost of sales." Factory Costs may be either "actual" 
(so-called), "recorded" or "normal" costs; "Cost of Sales" 



may be catalogue list price less a certain percentage to cover 
discounts from list and estimated costs of seUing, adminis- 
tration and estimated profit, or actual selling prices less a 
fixed percentage or a percentage varying with business con- 
ditions, or it may be the total of the charges against 
Factory Operation Account during a month (or other fiscal 
period) plus the decrease (or minus the increase) of the 
inventory during that period. 

Continuous Product, Single Product. The simplest sys- 
tem is one that is often used in a continuous process factory, 
making a single product, such as pig iron, or paper of one 
grade, or cotton goods of one grade, in which the total expend- 
iture of the factory in a month is divided by the number of 
tons or yards to obtain the inventor^' cost per ton or per yard 
for that month; then the factory is credited at the inventory' 
cost for all the goods shipped. In this way Factory Operat- 
ing account shows neither a profit nor a loss. The balance of 
the account. represents the inventory value of the product 
that has not been shipped, plus the inventory value of raw 
material on hand and that of the "work in process" or un- 
finished product. The system has the merit of simplicity 
and of low cost for bookkeeping, but it may lead to absurd 
results as to unit costs when the product of any month is low, 
or, possibly, nojthing, the factory being shut down for repairs 
or on account of a strike, or lack of raw material, or lack of 
orders. 

Varied Products. In factories making a variety of product 
the so-called "actual cost" may be obtained by a most elab- 
orate cost system, in which the cost of every article made 
includes the cost for direct material, direct labor and "bur- 
den," the burden or total indirect expenditure for a month 
being distributed according to some plan, such as the machine- 
hour rate plus a "supplementary rate," over the product of 
that month. This method, like the first one described, has 
the apparent bookkeeping merit of having the factory show 
neither a profit nor a loss, but it also has the demerit of giving 
useless and absurd cost figures when the factory is running 
below its normal rate. 

Recorded Costs may include the actual expenditures for 
direct labor and material, or "prime cost," plus a burden 
figure which may be a fixed percentage on labor or on material 
or on prime costs, or an arbitrary figure per unit of product 
which is estimated to be sufficient to cover the average burden 
during the year. This is a satisfactory method from a book- 
keeping standpoint, but it may lead to erroneous conclusions 
as to the cost of some portions cf the product. By this 
method the books may show that the factory makes a profit 
or a loss according to whether the total indirect expenses for a 
year are less than or greater than the burden which has been 
charged against the cost of the several products. 



35 



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36 



BOOKKEEPING AND COST ACCOUNTING 



Normal Cost includes the sum of direct labor and material 
or prime costs, and a standard burden charge on each item of 
product which is made by a careful estimate of the machine- 
hour rate which should be charged against each machine, 
work-bench, assembly floor, or other "productive center," 
such that the total of such charges to cost of product during a 
year of normal business shall approximate the total indirect 
expenses of the factory for such a normal year. In a year of 
brisk business the factory will show a profit equal to the excess 
of the sum of all the burden charges made against the cost of 
products over the charges against burden account or the total 
yearly indirect expenses. In a year of depression, when the 
factory is running below its normal rate, or in a year when it is 
badly managed so that a large part of the machinery is idle 
from lack of work for it, or the indirect expenses are unduly 
large, the factory will show a loss equal to the Unearned 
Burden, or the excess of expenses over the sum of the burden 
charges. 

Different Kinds of Industries 

1. Industries with continuous processes; uniform product 
with uniform specifications; single-purpose machines; uniform 
operations; simple routing. Illustrated by the manufacture of 
paper and pulp. 

2. Industries with non-continuous processes; uniform product 
with varying specifications; single-purpose machines; uniform 
operations; simple routing. Illustrated by the manufacture of 
envelopes, books, and handkerchiefs. 

3. Industries with non-continuous processes, varying products 
with varying specifications; multiple-purpose machines; vary- 
ing operations; complex routing. Illustrated by machine shops. 

From a lectiure on " Scientific Management," by H. S. Person, 
Ph.D., Director Amos Tuck School of Administration and 
Finance, Dartmouth College, President of the Taylor Society. 

Company or Private Ledger of a Manufacturing Business 
Resoitrces. Liabilities 



1. 


Cash. 


(Including Capital Stock and 


2. 


Accounts Receivable 


Surplus and Reserves.) 


3. 


Bills Receivable. 


1. Capital Stock. 


4. 


Merchandise. 


2. Bonded Debt. 


5. 


OflBce Fixtures. 


3. Surplus. 


6. 


Factory Plant, 


4. Reserves for 




including 


Bad Debts, 




Land, 


Depreciations, etc. 




Buildings, 


5. Accounts Payable. 




Permanent Equipment. 


6. Bills Payable. 


7. 


Factory Operating. 


7. Accrued Taxes 




Covers all investment in 


and Insurance. 




the factory except that 


8. Earned Interest. 




charged to plant. 


Charged to Factory. 


8. 


Deferred charges. 
Includes taxes and insur- 
ance paid in advance but 
not yet charged to Fac- 
tory or other accounts. 




9. 


Outside Investments. 





Subdivision of Total Expenditure for Factory Operations 

On Company's General Books 

Charge Factory with all money sent to factory. Credit 
Cash. Charge Factory with all purchases for 
account of factory. Credit Accounts Payable 
or Cash. 



Charge Factory once a month with its monthly propor- 
tion of the yearly expense for Interest, Taxes, 
Insurance, Depreciation. Credit Interest 
charged to Factory, Taxes, Insurance, Reserv^e 
for Depreciation. 

Credit Factory with all goods shipped by factory or put 
into warehouse on Company's account. 

On Factory Books 

(a) Credit Co. with all values received from Co. 
(6) Charge Co. with all values delivered to Co. 

(a) Charge Stores with material received. 

Labor with payroll money received and 
paid out on ace. of wages and salaries 
Cash with other money received from Co. 
Burden with the monthly charges made by 
Co. for interest, insurance, etc. 

(b) Credit Finished Product, Warehouse, or Stores with 

goods shipped. 



Work in Process 



Stores 



Burden 



Inter-departmental Accounts in Factory 
Charge Accounts 

Cr. Labor, Stores, Burden, for productive 

work. 
Cr. Work in process, for material returned 

from shop. 
Cr. Labor, Stores, Burden, for work done 
by departments not directly chargeable 
to Work in process. 

Burden Acct. is subdivided into as many dep)artmentai 
divisions as may be found desirable, such as power plant, 
blacksmith shop, repair shop, etc. 

Labor may be divided into Direct and Indirect Labor 
(sometimes but erroneously called Productive and Non- 
productive). Direct Labor is that which is expended upon 
the raw material converting it into finished material, and 
Indirect Labor is that which is employed in super\*ision or in 
keeping the factory running and is not directly chargeable to 
any particular part of the product. 

The Factory Books. The following is a skeleton of the 
principal factory accounts. They may be subdivided into 
departments, processes, or classes of product as desired, 
according to the nature of the business. 



Factory Accounts: 

Credit Company with all disbursements made by the Com- 
pany on account of factory operations. 
Charge 
Cash (Factory Cash) 
Stores 
Burden 

(that part of burden that is paid for directly by the Co.'s 
general office, such as insurance, taxes, etc., and charges 
made by Co. against the factory for Interest, Reser\^e for 
Depreciation, and the proportion of business adminis- 
tration that is chargeable to factory operations). 

Credit Cash, Stores, Labor, Burden, Work in Process. 



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FACTORY ACCOUNTING 



37 



Charge 

Work in Process, for costs of unfinished products. 
Warehouse, for cost of finished products. 
Betterments, for cost of additions to or improvement of 
the factory property. 



In these entries the credit to Burden is the "earned 
burden " or " normal burden." 



Charge Company 

Credit Warehouse, for goods shipped. 
Betterments, for cost of betterments, when they are 

finished. 
Work in Process, for outside work done on Company's 
orders. 



appraisal made of everything in the factory on January Ist, 
the whole details of which you will find in this schedule, and 
have deposited in the local bank to the credit of the factory 
$1000 as a fund from which to pay your minor current 
expenses. We will send a check for the amount of the pay- 
roll every week, and we will pay all the bills which you 
certify to us for payment for material purchased. You will 
credit us with all these items and charge us monthly at the 
'factory cost* with everything you send to us or to our cus- 
tomers. What is meant by * factory cost' you will find in 
this typewritten 'Book of Instructions.' " 

The Factory Accountant then opens his books with the 
following entries: 

In the Factory Cash Book 
Jan. I. 1916 



Credit Cash, Stores, Burden, Labor, Work in Process. 

Charge 

Cash for any receipts of factory cash for sale of stores, or 
of supplies which may have been previously charged to 
burden, or for any cash received from workmen and 
credited to them or the pa>Toll. 

Stores, with factory cash purchases of material for stores, 
or with labor expended on materials for stores, or with 
materials put in stores that were previously charged to 
burden, or to Work in Process. 

Burden, with all expenditures of factory cash for general 
factory expenses, with all indirect labor and indirect 
material. The burden of one department may be 
credited and the burden of another department charged 
when one department does work for another, or furnishes 
supplies that have been charged to the department 
burden of another department. 

Labor, with payroll payments in cash or in stores charged 
to workmen. 



OPENING A SET OF FACTORY BOOKS 

The principle upon which a factory accountant opens a set 
of books for factory operations considered as distinct from the 
commercial and financial operations of a company is that the 
factory owes to the "owner" of the business, which, on the 
factory ledger, may be be called "New York Office," "Com- 
pany," "A. B. Co." or "Private Ledger," all the net assets 
of the factory at their appraised valuation, that it credits 
the "Company" account with these assets, and credits it 
also with everything it receives from the Company, such as 
cash for the payroll, material and supplies, the invoices for 
which are certified to the Company for payment, and cash 
for minor current expenses, or "Petty Cash," and charges 
it with everything delivered to the Company or shipped to 
the Company's customers, the bills for which are to be paid 
to the Company. 

For example the Company's Chief Accountant may say 
to the Factory Accountant, "We have had an inventory and 



To Company 



1000 



00 



In the Journal 
Jan. I, 1916 



Sundries To Company as per Schedule of 

Factory Assets, Jan. 1 
Real Estate (Land and Buildings) 
Equipment (Fixtures, Furniture, Power 

Plant, Machine Tools, Small Tools) 
Material (Raw material for manufacture) 
Supplies (Fuel, Oil, Waste, Lumber, Paper, 

etc.) 
Mfg. a/c. (Work in progress in shops) 
Warehouse (Finished goods ready for Ship- 
ment) 
Worked Material (Partly finished products 
in stores) 



40,000 


1 


200.000 


80.000 
20,000 


00 
00 




5.000 
10,000 


00 
00 




30.000 


■go 




15.000 


00 





00 



After making these entries the Management decides that 
the last five accounts, or the goods represented by them, 
should be subdivided into departments or into classes of 
product, so as to facilitate the determination of costs. Thus 
the warehoused goods might be divided into four classes, 
Wl, W2, W3, W4, the Supplies into SI, Power-house Sup- 
plies; S2, Forge and Machine Shop Supplies; S3, Grinding- 
and Plating-room Supplies; S4, Shipping-room Supplies. 
The Accountant would then determine the most convenient 
way of making these subdivisions. He might projperly con- 
clude, if the business was a large and complex one, that in 
order to simplify the general factory books it would be better 
not to subdivide these accounts in the Works Journal and 
Works Ledger, but to keep them as controlling accounts, 
making the subdivisions on statistical sheets or cards or 
loose-leaf books. To simplify the accounts still further, and 
save clerical labor, he might keep no account with Worked 
Material, considering all p)artly finished goods as belonging 
to Mfg. Acct., and crediting that account only as the goods 
are delivered to the warehouse. Even Warehouse Acct. 
may be dispensed with, the finished products remaining in 
Mfg. Acct. until they are shipped, when they are charged to 
Company. Real Estate and Equipment may also be omitted 
from the Factory books and kept in the Company's General 
Ledger. 



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38 



BOOKKEEPING AND COST ACCOUNTING 



After the books have been opened suppose that a condensed 
summary of the transactions of the factory in the first month 
is as follows: 



Material purchased, bills certified to Co. for payment 

Supplies purchased, bills certified to Co. for payment 

Supplies purchased, paid for out of Petty Cash 

Labor, including salaries, paid by Co. on pay rolls 

Labor, paid out of Petty Cash 

Material delivered from Stores to Shop 

Supplies used during month 

Worked material, withdrawn from Stores 

Worked material, delivered by Shop to Stores 

Labor (inc. salaries) total credits on Pay Rolls 

Current Repairs, to tools, done in shop 

New Equipment built in shop 

Finished Goods delivered in Warehouse, at estimated "factory 

cost" 
Goods shipped from warehouse, at estimated factory cost 



5.000 

1.000 

200 

25.000 
200 

10.000 
1,500 
5,000 
6,000 

25,500 

too 

500 

35.000 
40.000 



From this summary the following Journal Entries would 
be made. 

January 31, 1916 



Sundries 


To Company 




31,000 


Material 




5.000 




Supplies 




l.-HH) 




Labor 




25.000 




Mfg. a/o. 


To Sundries 


42,000 




To Material 






10.000 


To Supplies 






1,500 


To Worked Material 




5.000 


To Labor 






25.500 


Sundries To Mfg. a/c. 




41.600 


Worked Material 




6,000 




Repairs 




too 




Equipment 




500 




Warehouse 




35,000 




Company 




40,000 




To Warehouse 






40,000 



Besides the above entries the following additional charges 
would be made to Mfg. a/c: One-twelfth of the estimated 
yearly interest on investment in the factory ^nd its contents, 
and yearly taxes and insurance, none of which is yet paid, 
7 J per cent on $200,000 = 15,000 -5-12 =$125C. One-twelfth 
of the annual estimated cost for depreciation, for obsoles- 
cence and for wear and tear and extraordinary repairs, 
14800, 400 

Minor repairs during the month, to close Repair a/c 100 

The entry would be 



Mfg. a/c. To Sundries 

To Adjustment of Interest, Taxes and Insurance 
To Reserve for Depreciation and Ex. Repairs 
To Repair a/c 




1250* 
400* 

too 



* These two items may be credited to Company account, instead of to 
the two accounts named. 

The Cash Book entries may be journalized at the end of 
the month (if they are not posted directly from the footings 
of the columns of a Column Cash Book) ajs follows: 



Sundries 
Supplies 
Labor 



To Cash 




400 



The entries of Jan. 1 and Jan 31 (and any other entries 
that may have been made during the month) are posted in 
the Factory Ledger, as follows: 

Factory Ledgkr 
Company 



Jan. 31 



To Warehouse 



40.000 ' 


Jan. 1 




Jan. 1 




Jan. 31 



By Cash 
By Sundries 
By Sundries 



1.000 

200.000 

31.000 



Real Estate 


Jan. 1 


To Company 


40.000 






Equipment 


Jan. 1 
Jan. 31 


To Company 
To Mfg. a/c. 


80,000 
500 

1 







Material 



Jan. 1 
Jan. 31 



To Company 
To Company 



20,000 
5.000 



Jan. 31 



By Mfg. a/c. 



10.000 



Worked Material 



Jan. I 
Jan. 31 



To Company 
To Mfg. a/c. 



15,000 
6.000 



Jan. 31 



By Mfg. a/c. 



5.000 



Supplies 



Jan. 1 
Jan. 31 
Jan. 31 



To Company 
To Company 
To Cash 



5.000 


Jan. 31 


1.000 




200 


- 



By Mfg. a/c. 



1,500 



Petty Cash 


Jan. 1 


To Company 


1,000 


1 
Jan. 31 


By Sundries 


400 






Mfg. a/c. 







Jan. 1 
Jan. 31 
Jan. 31 



To Company 
To Sundries 
To Sundries 



10,000 

42,000 

1,750 



Jan. 31 



By Sundries 



41.600 



Labor 


Jan. 31 
Jan. 31 


To Company 
Petty Cash 


25,000 
200 


Jan. 31 


By Mfg. a/c. 


25,500 


Adjustment of Int. Tax and Ins. 


j 




Jan. 31 


By Mfg. a/c. 


1.250 


Reserves for Depreciation and Ex. Repair 








Jan. 31 


By Mfg. a/c. 


40O 



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FACTORY ACCOUNTING 



39 



Factory Leoqer {Continued) 
Current Repairs 




Jan. 3! iTo Mfg. a/c. 


1 
100 j Jan. 31 By Mfg. a/c. 

1, 1 


100 


Warehouse 


Jan 1 1 To Company 
Jan. 31 To Mfg. a/c. 


30.000 Jan. 31 By Company 
35,000 

1 


40,000 



Trial Balance and Monthly Statement 

A trial balance and monthly statement of the Ledger for 
Jan. 1 and Jan. 31 would show the followmg: 



Jan. I 


Balance 




January 


Balance Jan. 31 


Dr. Cr. 


Charge 


Credits 


Dr. 


Bal. Cr. 


201.000 


Company 


40,000 


31.000 




192.000 


40,000 j 


Real Estate 






40,000 




80.000 1 


Equipment 


500 




60.500 




20.000 1 


Material 


5,000 


10,000 


15.000 




15.000 


Worked Mat. 


6.000 


5,000 


16.000 




5.000 1 


Supplies 


1.200 


1,500 


4,700 




1.000 


Petty Cash 




400 


600 




10.000 




Mfg. a/c. 


43.750 


41.600 


12.150 








Labor 


25,200 


25.500 




300 






Adj. of Int. etc 




1.250 




1,250* 






Reserves 




400 




400* 


30.000 




Warehouse 


35.000 


40.000 


25.000 




201.000 201,000 


. 


156,650 


156.650 


193,950 


193,950 



* See footnote on page 3S. 

ACCOUNTING CODE FOR A MANUFACTURING BUSINESS 

The principal accounts in the general books of a manu- 
facturing concern are the following: 



Assets and Expenses 

Cash 

Bills Receivable 

Accounts Receivable 

Facton% Real Estate and 
Equipment 

Factory Operating (or Manu- 
facturing Acct.) 

Mdse. (or Sales Acct.) 

Administration and Selling 
Exp. 

Outside Investment (if any) 



Capital and Liabilities 

Capital Stock 
Bonded Debt 
Surplus 

Profit and Loss 

Bills Payable 
Accts. Payable 

Reserve for Depreciation 
Other Reserves (if any) 



Besides these there are other accounts which represent 
assets or expenses if they have debit balances, and liabilities 
or profits if they have credit balances, such as Taxes, Insur- 
ance, Discount and Interest. Some accountants divide 
Taxes and Insurance each into two subdivisions, for example. 
Accrued Taxes, Prepaid Taxes, but this Is needless. If taxes 
have been prepaid, the debit balance of the account shows 
that fact; if there is a credit balance it represents the amount 
of accrued taxes, not paid, which have been charged to fac- 
tory operating or some other expense account. 



The transactions and the corresponding journal and cash 
book entries for the last month of a year or other fiscal period 
may be as follows: 



Transactions 



Stores bought for factory 

Factory is charged with its monthly 
proportion of General Charges 
such as interest on factory invest- 
ment, taxes, etc. 

Goods were shipped from the fac- 
tory and charged to Sales Acct. 
at factory cost 

Bales were made on open account \ f Accts. Rec. 39,000 \^ _ _ , 

^ Bills lUc. I0.000P°S*'»^» 



Journal Entries 

Factory Operating: 
To Accts. Payable 
To Bills Payable 

To Taxes and Insurance 
To Res. for i:epn. 
To Interest Chgd. Facty 
To Admin. Exp. 



Sales To Factory Oper'tg. 



10.000 
10,000 

300 
600 
500 
1000 

40,000 



and on notes reo. 



'){': 



49,000 



Cash Book Entries 



Cash sales were made 


Cash To Sales 


6,000 


Cash was received in payment of 


To Bills Reo. 


12,000 


notes and accts. 


To Accts. Reo. 


40,000 


Cash rec. for interest 


To Disct. and Int. 


300 


Bills and accts. pay. were p^d in 


Cr. By Accts. Pay. 


22,000 


cash 


Cr. By Bills Pay. 


3,000 


Cash was paid for factory pasrroll 


Cr. By Factory Oper'g 


15,000 


Cash was paid for administration 


Cr. By Adm. Expense 


2,000 


and selling expense 


Cr. By Sales Expense 


8,000 


Cash was paid for insurance, taxes. 


Cr. By Insurance 


600 


and interest 


Cr. By Taxes 


400 




Cr. By Dis. and Int. 


500 



Transfer and Balancing Entries 

After the above entries are made and posted several trans- 
fer entries are needed before making a balance sheet. 

At the beginning of the month Administration and Selling 
Expense Accts. showed debit balances amounting to $2000, 
representing advances to salesmen and advance advertising 
This together with $10,000 charged during the month, less 
a credit of $1000 which has been charged to Factory Operat- 
ing is now charged to Sales Account. 

The credit balance of Sales Account, $4000, is transferred 
to the credit of Profit and Loss. 

Sales 




The factory reports that the total cost of betterment work 
for the fiscal period is $2000 and the general bookkeeper 
enters it as an addition to the permanent assets. 

Factory R. E. & Equip. 



To Factory Operating 



2000 



The factory reports the cost value of spoiled work for 
which no charge could be made to customers or to the cost 
of finished goods; also the loss of unearned burden, due to 
idleness. 

Profit & Loss 



To Factory Operating 



1000 



Digitized by 



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40 



BOOKKEEPING AND COST ACCOUNTING 



A loss of S500 on Accounts Receivable, and the debit 
balance of Discount and Interest, 11200, are charged to 
Profit and Loss. 

Profit & L08B 



To AcctB. Rec. 
To Dis & iDt. 





its present value but to transfer a part of the credit balance 
of Reserve for Depreciation to Surplus Account, making it 
available for dividends. 

Reserve for Dep'n 



To Surplus 



5000 



Interest charged to Factory shows a credit balance which 
has accumulated during the fiscal period, and is now credited 
to'Profit and Loss as part of the profits of the business. 

Interest Charged to Factory 



The credit balance of Profit and loss is transferred to 
surplus Acct. 

Profit & Loss 



To Profit and Loss 



5500 



To Surplus 



11.800 



The factory reports that one of its heavy machines had an 
accident requiring costly repairs which were made in the 
factory, and which ought not to be charged to current repairs 
and thence to the cost of finished goods, but to reserves for 
depreciation. 

Reserve for Depreciation 



A dividend of 8 per cent on the capital stock is declared 
payable Jan. 15th. 

Surplus 



To Dividend 



8.000 



To Factory Operating 



1000 



A re-appraisal of the factory machinery shows that it has a 
much higher value and longer probable fife on the average 
than was assumed in making the appraisal five years earlier, 
when the estimated annual credit to Reserve for Deprecia- 
tion was fixed. The management decides to let Factory 
Real Estate and Equipment account stand on the books at 



When the dividend checks are signed and mailed, a 
cash-book entry will close Dividend Account, Cash being 
credited. 

The Journal-Ledger form of posting all the above entries is 
shown on one sheet, below, the liabilities at the beginning of 
the month being entered on the upper line and the assets in 
the left-hand column. In this sheet the balances of each 
account both at the beginning and end of the month are 
shown, as well the transactions during the month. 



COMPANY'S GENERAL LEDGER 
Liabilities — Credits 





i 
5 


1 

! 


1 


3 


1 

S 


1 


St 

If 

a 


J 


1 
1 


1 

s 

1 


1 


a 


1 

.s 


< 






tc 

1 


.2 


8 


Total Dr. 
(not incl. 
Dalancoo) 


Total Bal. 200.000 




100.000 


40.000 


10.000 




15.000 


5.000 


5.000 


5.000 


20.000 






















Cash 


25.000 




















300 


12.000 


40.000 










6.000 


58J00 


BiUs Rec. 


15.000 




































10.000 


10.000 


Accts. R«c. 


45.000 




































39.000 


39.000 


2 Ins. & Taxes 


2.000 




















1.000 


















1.000 


2 Fcty. R. £. d: £. 


50.000 
































•2.000 






ZOOO 


QFcty. Op'g. 


60.000 










fOO 


500 




10.000 


10.000 


15.000 








300 






1.000 




37.400 


1 Ad. & S. Exp. 
w Dis. & Int. 


2.000 




















10.000 


















10.000 


1.000 




















500 


















500 


S Res. for Dep. 








•5.000 


























•1.000 






6.000 


^ Int. ch«'d Fcty. 
















•5.500 
























5.500 


P. &L. 








•11.800 
















•1.200 




•500 






•1.000 






14.500 


Bills Pay. 






















3.000 


















3.000 


Accts. Pay. 






















22.000 


















22.000 


Sales 
















•4.000 


















40.000 


•11.000 




55.000 


Surplus 


Cr. 








*^000 






























8.000 


Total for Month / 






16.800 


8.000 


600 


500 


9.500 


10.000 


10.000 


51.500 


1.500 


12.000 


40.500 


300 




44.000 


izooo 


55.000 


272.200 


Dr. 
Cr. 






8.000 




6.000 


5.500 


14.500 


3.000 


22.000 


58.300 


500 


10.000 


39.000 


1.000 


zooo 


37.400 


10.000 


55,000 


272JO0 


Balances for Mo. | 






8.800 


8.000 








7.000 






1.000 


2.000 


1.500 






6.600 


2.000 




36.900 


Dr. 
Cr. 










5.400 


5.000 


5.000 




12.000 


6.800 








700 


2.000 








36.900 


New Balances / 


100.000 


40.000 


18.800 


8.000 


9.600 






12.000 


8.0C0 




















196.400 


Dr. 


















3I.80C 




13.000 


43.500 


2.700 


52.000 


53.400 






196.400 



* Transfer and balancing entries. 



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FACTORY ACCOUNTING 



41 



The Factory General Ledger 

From the Company's General Ledger entries for the month 
it is seen that the debits and credits of factory operating 
accomit cover all the transactions of the company with the 
Factory. At the beginning of the month the account showed 
a debit balance of $60,000. On the Factory Ledger this will 
appear as a credit to Company accomit, and it will be bal- 
anced on this ledger by debits to Stores, Work in Process, 
Warehouse, and Factory Cash, and a credit to Labor account 
for wages due and unpaid. The credits to Cpmpany account 
during the month, totaUng S37,400, will be debited to Com- 
pany General Charges (a subdivision of Burden), S2400, 
representing the charges for Reserve for depreciation, $600; 
Interest, $500; Insurance and Taxes, $300; and Adminis- 
tration charges (proportion of officer's salaries and general 
office expense charged to the factory, $1000); also purchases 
of material for the factory, $20,000, charged to Stores ac- 
count, and cash sent to the factory for payroll and other cash 
expenditures, $15,000, charged to Factory Cash. 

The charges to Company account, $44,000, will be balanced 
by credits to Warehouse, for goods shipped, at factory cost, 
S40,000; to Spoiled and Defective Work, which could not be 
charged to the cost of finished goods in the Warehouse, say 
$400; to Burden account, representing unearned burden, 
which is a loss due to idleness or other cause, not properly 
chargeable to the cost of finished goods, say $600; to Better- 
ments, $2000 for work done on additions to the factory equip- 
ment; and to Repairs and Mamtenance (part of Burden) 
$1000 for extraordinary repairs, which will be charged on the 
Company's books to Reserve for Depreciation. The entries 
of the above-named items might appear on the Factory 
Journal and Cash Book as follows: 



Sundries To Comx>any 

Stores 

Cash 

Burden (Gen. charges) 


20.000 
15.000 
2.400 


37,400 


Company To Sundries 

To Warehouse 


44,000 


40,000 



To Betterments 




2,000 


To Burden: 






Spoiled work 400 






Unearned burden 500 






Extra repairs 1,000 




2.000 



Besides the above entries there might be the following 
representing transactions inside of the factory. 



Sundries To Labor 




16,100 


(Distribution of labor as per pasrroU and Job 






tickets) 






Stores 


300 




Work in Process (Depts. A. B. C.) • 


10,000 


* 


Auxiliary Depts. (Depts. D. E. F.) 


2,000 




Betterments 


600 




Burden (Supt., foreman, gen. labor) 


5,000 




Warehouse 


200 





* Separate accounts would usually be kept for the separate departments. 
The work in process might be divided into classes of product as A, steam 
engines: B, steam turbines, C, other products. The auxiliary departments 
are Power House, Tool Room, Repairs and Maintenance, Blacksmith Shop, 
Yard, etc. 



Sundries To Cash 
Labor (Wages and Salaries paid) 
Stores, Petty cash exp. 
Aux. Depts., Petty cash exp. 
Warehouse, Petty cash exp. 


14.000 
400 
200 
100 


14,700 


Sundries To Stores 
Work in Process 
Betterments 
Auxiliary Depts. 
Burden (supplies issued) 
Warehouse (supplies issued) 
Labor (charged to workmen) 


17,000 

1.000 

2.000 

2,400 

200 

200 


22,800 


Sundries To Work in Process 
Stores (partly finished work put in stores) 
Warehouse, finished product 


5.000 
36.000 


41,000 


Sundries To Auxiliary Depts. 

Work in Process ^work done in the auxiliary depart- 
ments directly chargeable to work in process) 

Warehouse (work done on finishing products in 
the warehouse) 

Burden (power plant and other general factory 
expense) 

Auxiliary Depts. (Subdivided in the actual account- 
ing) work done by one department for another 


2.000 

900 

3.000 

2.000 


7,900 



FACTORY LEDGER 







Co. 


Labor 


Cash 


Stores 


Work in 
process. 


Better 
ments 


Aux. 
Depts 


Burden 


Ware- 
house 


Total 
Debits 


Company 














2,000 




2,000 


40.000 


44.000 


Labor 








14.000 


200 












14,200 


Cash 




15.000 


















15.000 


Stores 




20.000 


300 


400 




5,000 






400 




26.100 


W^ork in process 






10.000 




17,000 






2.000 


8.000 




37.000 


Betterments 






600 




1,000 








400 




2,000 


Aux. depts. 






2,000 


200 


2,000 






2.000 


1,700 




7,900 


Burden 




2,400 


5.000 




2,400 






3,000 






12,800 


Warehouse 






200 


100 


200 


36.000 




900 


300 




37,; 00 


Total crediU 




37.400 


18.100 


14.700 


22.800 


41.000 


2.000 


7.900 


12,800 


40.000 


196.700 


Total debits 




44,000 


14.200 


15.000 


26.100 


37,000 


2.000 


7,900 


12.800 


37,;oo 


196,700 


Bal. for month 


/Cr. 
iDr. 


6,600 


3.900 


300 


3.300 


4.000 








2.300 


10,200 
10,200 


Bal. at 1st of month 


/Or. 
IDr. 


60,000 


500 


4,000 


20.000 


18,000 








18.500 


60,500 
60,500 


New balances 


rcr. 

IDr. 


53,400 


4,400 


4.300 


23.300 


14,000 








16.200 


57,800 
57,800 



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42 



BOOKKEEPING AND COST ACCOUNTING 



8undrie0 To Burden 






M per Burden Diotribution sheet 




10.800 


Stores 


400 




Warehouee 


300 




Work in Process 


8.000 




Betterment 


400 




Auxiliary Dex>artment8 


1,700 





Putting these entries into the Journal-ledger form they 
appear as shown on page 41. 

A SIMPLE ACCOUNTING SYSTEM 

A simple double-entry bookkeeping system for a man- 
ufacturing concern is illustrated below. The General Ledger 
or Private Ledger has only from twelve to fifteen accounts, 
but they are all that are necessary. A purchase or invoice 
ledger might be kept in which each creditor would have a 
page, and a sales ledger in which each debtor would have a 
page, but these are by no means required, for all the infor- 
mation that an invoice ledger would contain, and more, is 
found in the alphabetical file of the creditor's bills, and all 
that a sales ledger would contain is found in the alphabetical 
file of the carbon copies of the bills and statements rendered 
to the debtors. By dividing each file into two parts, Paid 
and Unpaid, the accountant can at any time find out by 
adding (preferably on an adding machine) the amounts of 
unpaid invoices and bills how much is owing to or by the 
concern on open accounts. The auxiliary Bill Book furnishes 
a more correct record of Bills Receivable and Bills Payable 
than the ledger does. A simple statistical sheet with entries 
made on it from the ledger at the end of each month shows the 
general course of the business during the year. 

In this system Manufacturing Account is charged each 
month with all the costs of operation that appear as direct 
charges in the Cash Book, Petty Cash Book and Invoice 
Book, but it is not until the end of the year (or other fiscal 
period) charged with depreciation of material or equipment, 
or with interest on investment, or credited with the value of 
the manufactured products. Merchandise is credited with 
all sales, whether of manufactured or partly manufactured 
product, or of raw material that has been sold, and is not 
charged until the end of the year with the cost of goods 
sold. 

The following is a statement of the summarized trans- 
actions that are journalized monthly and posted in the 
General Ledger. 

Transactions 

(A) Stockholders Invested $100,000 Cash. 

(B) Paid $50,000 for Factory Property. 
(O Bought Material and Supplies $20,000. 

(D) Paid for Labor. Salaries, Taxes, Insurance, and Factory Expense $25,000. 

iE) Paid for Purchases (Cash) $10,000. 

(F) Issued Notes for Purchases $9,000, and Interest $150. 

(G) Paid for Advertising. Traveling, and other Selling Expenses, $5,000. 
iU) Paid for Office Furniture $400, and Stationery, $100. 

(/) Sold Factory Products on Acct., $18,000. 

(J) Sold ditto for Cash, $2,000. 

iK) Received Cash in part payment of accts., $3,000. 

(I>) Received Notes with interest ($250) added, for accts., $12,000. 

(Jf) Discounted some of these notes, $10,000, bank deducting discount, 

$200. 

(N) One of our banks credits us interest on deposits, $100. 



Journal 

(Summarising the month's entries in 
Cash Book, Petty Cash, Sales Book 
Payable Book. The letters i4, B, C, 
Cash " 

U) 
(J) 

iM) 

(iV) 

Sundries 



Entries 

the books of original entry, such u 

Invoice Book. Bills Receivable &ad 

etc., refer to the list of Transaction^ - 



(B) 
(i» 
(S) 
iG) 
(H) 
(H) 
(Af) 
(C) 

(F) 



(/) 



To Capital Stock 
To Mdse. 
To A/cs. Rec'ble 
To BUls Rec'ble 
To Interest 

To Cash 
Real Estate and Equipment 
Mfg. a/c. 
Accts. Payable 
Sales Expense 
Office Furniture 
Mfg. Acct. 
Interest 
Mfg. a/c. 

To Accts. Pay. 
Accts. Payable 
Interest 

To Bills Pay. 
Accts. Rec'ble 

To Mdse. 
Bills Rec'ble 

To Accts. Rec'ble 

To Interest 



115,100 



50,000 

25.000 

10.000 

5.000 

400 

100 

200 

20,000 

9,000 
150 

18.000 

12,250 



IOO.0O0 

2.000 

3.000 

10,000 

100 

90.700 



20,000 

9.150 

18,000 

12.000 
250 



In the ordinary form of Ledger these entries would be 
posted as below: 

Ledger 

Capital Stock 







By Cash 


100.000 


Cash 


To Sundries 


115,100 


By Sundries 


90.700 


Real EsUte and Equipment 


To Cash 


50.000 






Office Furniture 


To Cash 


400 


1 

1 




Bills Receivable 


To Sundries 


12,250 


By Cash 


10.000 


Accounts Receivable 


To Mdso. 


18.000 


By Cash 
By BilU Rec. 


3.G00 
12.000 


Bills Payable 






By Sundries 


9.150 


Accounts Payable 


To BUIs Payable 
To Cash 


9.000 
10.000 


By Mfg. Acct. 


20.000 



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FACTORY ACCOUNTING 



43 



LedgeT-— (Continued) 

Mfg. Acct. 




Mdse. 



By Cash 

By A/ca. Rec. 



2.000 
18,000 



Sales Ezpenae 



To Caah 



5,000 



Interest 



To Cash 
To Bills Pay. 




By Cash 
By Bills Rec. 



100 
250 



350 



Trial Balance 



Capital Stock 




100,000 


Cash 


24,400 




Real Estate, and Equip. 


50.000 




Office Furn. 


400 




Bills Rec. 


2.250 




Accta. Rec. 


3,000 




Bills Pay. 




9,150 


Accts. Pay. 




1.000 


Mfg. Acct. 


45,100 




Mdse. 




20,000 


Sales Expense 


5,000 




Interest 








130.150 


130.150 



The system, as shown in this elementary form, is one in 
which the entries in the General Ledger during the year are 
made only of actual transactions between the concern and 
outside parties, the values being ascertained from bills, 
invoices and payrolls. It takes no account of transfers of 
values inside of the concern, of changes of values, or of 
profits or losses in the factory operations, until the end of the 
fiscal period. 

The accounts being kept as above for twelve months a 
trial balance taken at the end of the period may show the 
. following: 

Trial Balance 



CapiUl Stock 




100,000 


Cash 


20.000 




Real Estate and Equipment 


50.000 




Office Furniture 


5C0 




Bills Receivable 


5,000 




Accounts Reoeivable 


25.C00 




BiUs Payable 




30,000 


Accounts Payable 




15,000 


Manufacturing Aeoount 


250,000 




Merchandise 




215,000 


Sales Expense 


10,000 




Interest 




500 




360,500 


360,500 



Inventory 
The inventory taken at the end of the year shows. 



Real Estate and Equipment 




49.000 


Depreciation 


1000 


Office Furniture 




400 


Depreciation 


100 


Mfg. Acct. Matl. and Supplies 


30.000 








Work in Process 


20,000 


50.000 






Mdse., Finished Product in 










Warehouse 




20.000 







The depreciations 11000 and $100 may be charged either 
directly to Profit and Loss or indirectly to Mfg. Acct. as 
part of the expense of factory operations. The credit bal- 
ance of interest account is due to financial rather than to 
factory operations and, therefore, may be credited to Profit 
and Loss. 

The Sales Expense, $10,000, is chargeable against the gross 
proceeds of sales $215,000. 

The following Journal entries should, therefore, be made: 



Mfg. Acct. To Sundries 

To Real Estate and Equipment 
To Office Furniture 




1,000 
100 



Interest 

To Profit and Loss 
Mdse. 

To Sales Expense 



When these entries are posted and the inventories entered 
in red ink in the respective accounts Manufacturing account 
will appear as follows: 



Dr. 


Mfg. 


Acct. 


Cr. 


Bal. (Trial Bal.) 
To Sundries 


250,000 
1,100 


Invty. 

Bal. (tr. to Mdse.) 


60,000 

eoijoo 




251.100 


251.100 


To Bal. (Invty.) 


f 





The balance on the credit side represents the total man- 
ufacturing cost, including all the losses in the factory, of the 
Mdse. that was sold for $215,000 and of the $20,000 Mdse. on 
hand. It should, therefore, be charged to Mdse. account and 
the difference then appearing between two sides of the 
account closed into Profit and Loss by the following Journal 
entry: 



Mdse. 
To Profit and Loss 
Sales of Mdse. 
Inventory 



Cr. Bal. of Mfg. Acct. 201,100 
Selling Expense 10.000 



215.000 
20.000 

235,000 

211,100 




23,900 



Digitized by 



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44 



BOOKKEEPING AND COST ACCOUNTING 



Merchandise Acct. will then be balanced as below: 

Dr. Mdse. Cr. 



To Sales Exp. 
To Mfg. a/c. 
To Profit and Lees 


10.000 

201.100 

23.900 


Bal. (Trial Bal.) 
InHy. 


215.000 
£0,000 




235.000 
"~20,0W 


235.000 


To Balance 





A Profit and Loss Statement may now be made as below: 



Total Sales 

Leas Selling Expense 


201.100 
20.000 


215.000 
10,000 


205.000 
181.100 


Cost of Sales 
Credit to Mfg. Acct. 
Less Invty. of Mdse. on hand 




Profit on Sales 

Profit on Interest Acct. 




23.900 
500 


ToUl Profit 


2M00 



A Balance Sheet taken after all the closing entries are 
posted will show the following: 



Dr. 


Balance Sheet 


Cr. 


Cash 


20.000 


Capital Stock 


100.000 


R. Est. and Equip. 


49,000 


Bills Payable 


30.000 


Office Fur. 


400 


Accts. Payable 


15.000 


Bills Reo. 


5.000 


Profit and Loss 


24,400 


Accts. Rec. 


25.000 






Mfg. Acct. 


50,000 






Mdse. 


20,000 








169.400 


169.400 



Adjustments and Criticisms — The Auditor's Report 

It thus appears from the books that the net earnings of the 
concern are $24,400, or 24.4 per cent of the capital stock. 
We will suppose that an auditor, who is well acquainted with 
the nature of the business and is competent to act as an 
appraiser as well as an auditor, is asked to report on the 
accounts and also to advise as to how much of the $24,400 
apparent net earnings should be considered available for divi- 
dends. 

He reports that the accounting system is admirable for the 
purposes for which it was intended, that is, keeping a record 
of all transactions between the Company and its debtors and 
creditors, and of all receipts and expenditures, and also 
showing in the statistical sheets the progress of the business 
from month to month. He says: "I have verified the cash 
and bills receivable on hand; I find that the balance of the 
Accounts Receivable correctly represents the balance due by 
debtors of the Company for goods sold to them, and balances 
of Bills Payable and Accounts Payable correctly show all the 
liabiUties of the concern to its creditors (contingent liabilities 
due to endorsements of bills receivable not included); that 



all goods shipped to customers are accounted for by the ship- 
ping book and have been properly charged at contract prices 
in the Sales Book, and that the invoices for all purcha^s 
have been verified as to receipt of goods and as to correctness 
of prices. The books have been kept correctly, and the trial 
balance dated Dec. 31st, taken from the books before the 
profit and loss entries were made, is a true statement of the 
ledger balances of that date. 

The closing entries, which have been made in order to 
determine profits and losses, depend for their validity upon 
certain assumptions: 

1. That the depreciation in value of Real Estate and 
Equipment was $1000 and that of Ofiice Furniture $100. 

2. That the inventory values, Material and Suppii^, 
$30,000; Work in Process, $20,000, and Mdse. $20,000, are 
correct. 

3. That nothing remains of the $10,000 charged to Sales 
Expense which is of any appraisable value for the business 
of the coming year. 

4. That of the total charges to Mfg. a/c $250,000, during 
the year, the whole amount is covered by the cost of goods 
sold and the cost of the material and goods inventoried, and 
that none of it belongs to expenses incurred partly for the past 
year's business and partly for business of the current and 
future years (such as p)attems and small tools charged to 
expenses of manufacturing, but which have some value yet 
remaining). 

5. That the credit of the balance of Interest, $500 to Profit 
and Loss is correct, which could be the case only if the book 
values of Bills Receivable and Bills Payable are their present 
values, or that the face or book values do not include interest 
which is not yet accrued. 

6. That all the Bills Receivable and Accounts Receivable 
represent good accounts, collectible at their due dates. 

Before I can give an opinion as to the Profit and Loss 
entries I must ask for an explanation of these six items." 

The head bookkeeper replies to the auditor, "I can answer 
as to the fifth and sixth items, but as to the others I will have 
to refer you to the cost accountant. Referring to the sixth 
item there is one account receivable, amounting to $1,000, 
which is doubtful, as the concern is in the hands of a receiver. 
We may ultimately collect this account in full, but it is quite 
uncertain." "In that case," says the auditor, "it had better 
be transferred to a Suspense Account." As for the fifth item, 
the Interest Credit balance, the present value of the Bills 
Receivable is about $50 less than their face value, which 
includes interest not yet due. The Bills Payable were drawn 
at 60 days without interest, in accordance with the terms on 
which the materials were purchased. Of the $30,000 Bills 
Payable outstanding Dec. 31st, the average date of pay- 
ment is about one month later. If we discounted them and 
paid them now we could gain $150 for interest, which we 
might credit to interest or to Mfg. Acct. as might seem 
proper. 

''As the Bills Payable were issued in payment for material 
charged to Mfg. Acct. the entry naturally would be 

Mfg. Acct. Dr. To Bills Payable, $30,000. 



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FACTORY ACCOUNTING 



45 



If we could pay the notes a month before they were due 
receiving a rebate of interest S150 the entries in the Cash 
Book would be 

Cash Cr. By Bills Payable, $30,000 
Cash Dr. To Interest, 150 

But if we do not discount either our notes receivable or our 
notes payable, but let them run to maturity, what is the use 
of making any entries for interest not accrued, just because 
we wish to be exceedingly precise in our annual Profit and 
Loss statement? If we made such entries we would have to 
make counter entries later on when the interest had accrued 
and the notes were paid. It is better to let both Bills Receiv- 
able and Bills Payable appear on the annual statement at 
their face values, and if precision is desirable, to enter in a 
footnote the amounts of interest not accrued at the date of 
the statement. 

As to the $500 credit balance of Interest account which 
we have closed into Profit and Loss, that represents the actual 
gain due to having interest added on notes receivable and 
holding these notes until near their date of maturity, when we 
put them in the bank for collection instead of having them 
discounted." 

The auditor expressed himself as satisfied with this explana- 
tion, and then had an interview with the cost accountant, 
who showed that he had a most elaborate cost system, kept 
with great care, that a perpetual inventory was kept of all 
raw material and partly worked material in the stores, as 
well as of finished products in the warehouse, and that the 
work in process at the time of taking the inventory was all 
priced at its actual cost of labor and material as shown by 
the job tickets, plus its proper proportion of burden charge. 
"The inventory values," said the accountant, "are the ac- 
tual cost values as they appear on the cost ledger and they 
are correct, as they are proved by the general ledger, the cost 
accounts being tied to the general accounts according to the 
practice of the highest authorities in accounting." On being 
questioned further the accountant produced a tjrpewritten 
document which explained his method, as below: 

CODE OF THE COST ACCOUNTANT 

Company's General Ledger. All disbursements made or 
indebtedness incurred on account of the factory is charged 
in the General Ledger to only two accounts. Real Estate and 
Equipment, and Manufacturing Account. No credits to 
these accounts (except in the case of the sale of some of the 
real estate or machinery) are made until the end of the year. 
A statistical statement is made showing the total charges to 
Mfg. Acct. each month, and the accumulated total to the 
end of the year. The sources from which these charges 
originate are the Cash Book, which gives the amounts paid 
on the Pay Rolls, and Petty Cash disbursements for the 
factory, and the invoices for materials purchased. 

All sales of goods from the factory warehouse, whether 
produced in the factory or purchased outside are credited to 
the Mdse. Acct. at the net price at which Xhey are charged 
to customers in the Sales Ledger. No charges to this account 



(except for goods returned or for allowances) are made until 
the end of the year. A statistical sheet shows the monthly 
sales and the total sales to date. 

The Factory Ledger. A double-entry factory ledger is 
kept, in which "Private Ledger" account is credited with all 
the amounts that are charged as above stated to Mfg. Acct. 
in the General Ledger, the following accounts being debited: 

LD. Direct Labor. Labor employed directly in man- 
ufacturing, and charged on job tickets to the 
product made. 

LX. Indirect or Expense Labor. Including salaries, 
and all factory labor that cannot be charged 
directly to specified products. 

SM. Stores. Purchased material ifsed in the manu' 

factured product. 
SS. Stores, Supplies. Fuel and other supplies pur- 
chased in quantity and issued by the stores as 
needed. SS. and SM. are recorded in a per- 
petual inventory. 

SX Expense Supplies. Minor supplies, such as small 
tools, charged directly to expenses of the factory 
departments — ^not inventoried. 

OX. General Expense. Taxes, Insurance, Water Rent, 
and other expenses, details of which are entered 
in a General Expense book, which has columns 
for the different classes of expense. 

Purchased from out- 
BB. BM. Betterments to Buildings 
and Machinery. 



ER. Repairs to Equipment. 



side and not pur- 
duced in the fac- 
tory. 



Credits of Labor and Material Accounts — Direct Labor, 
LD., and Stores, SM., appUed directly to the manufacture of 
goods, are charged on the job tickets to one of the two oper- 
ating accounts, WM., worked material, which includes both 
work in process and work which has undergone one or more 
operations and is kept in store for future operations or finish- 
ing, and FP., Finished Product, which includes both the 
finished goods delivered to the warehouse for shipment and 
work which has been withdrawn from worked material stores 
and is undergoing the finishing processes, such as fitting, 
assembling, painting, packing, etc. They are also charged 
on job tickets to the betterment accounts, BB., buildings, and 
BM., machinery. 

Perpetual inventories are kept of worked material in stores 
and of goods in warehouse. 

Indirect Labor, LX., and Stores, SS. and SX., are credited, 
as applied or issued, on Expense books or Department 
Expense sheets, and charged to the following accounts: 

PP. Power Plant. 

EC. Office and Clerical Work. 

ES. Superintendence. 

ER. Repairs and Maintenance. 

GX. General Expense or its subdivisions. 

At the end of each month all the entries on job tickets and 
expense sheets are added (on adding machines) to obtain the 



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BOOKKEEPING AND COST ACCOUNTING 



total hours of labor, wages earned, and value of supplies 
issued, and the totals of charges to the several charge accounts. 
A journal entry of these totals is then prepared in the follow- 
ing form : 









Journal Entby 
Charge Accta. 




Date. 
No.. 








Arnt. 


WM FP 1 BB 


BM 


PP 


EC 


ES 


ER 


GX 


Credit. 

LD 

LX 

8M 

8S 




1 














sx 

Total 


-^ 




. 











When this entry is posted the labor accounts on the factory 
ledger will show a credit balance, since the total credits to 
LD. and LX. cover all the labor that has been performed 
during the month, as credited to the workmen on the pay- 
rolls or salary lists and as charged to the several accounts on 
the job tickets and expense sheets, while the debit entries 
are only those representing the amounts that have been paid. 

Burden Account The Total charges to PP., EC, ES., 
ER. and GX., represent the factory overhead or burden, 
but some of them are not properly chargeable to the cost of 
production of the current month, but should be distributed 
over several months. For example, if taxes and insurance, 
charged to GX., are paid annually, only one-twelfth should be 
charged to Burden each month. Also if an expensive repair 
job should be done in one month its cost may be distributed 
over several months. A journal entry is to be made each 
month charging Burden and crediting PP., EC, ES., ER. 
and GX., for so much of these accounts as pertains to the cost 
of that month's production, the debit balance remaining in 
these accounts being the amounts carried over to be credited 
in other months. 

Distribution of Burden. The total monthly debit to 
Burden acct. is charged to WM., FP., BB. and BM. accounts 
in the following manner: Each job ticket is charged with the 
standard burden for the particular job, on the machine-hour 
rate or production-center-hourly rate basis. The sum of the 
charges thus made is added up and the total compared with 
the total debit of Burden acct. for the month, and the dif- 
ference divided by the sum gives a percentage or supple- 
mentary rate which is to be added to the cost of each job. 

A statistical sheet is kept showing the total cost of manu- 
facturing operations each month, as follows: 

Raw Material Purchased. 

Raw Material issued by Stores. 

Raw Material balance at end of month. 

Labor on Worked Material. 

Burden on Worked Material. 

Total, Matl. Labor and Burden. 

WM., L. & B. issued for Finishing. 

Labor on Finishing. 

Burden on Finishing. 



Total cost of Finished Product. 

Cost of FP. Sold. 

Balance FP. in Warehouse. 

The statistical sheet for the preceding year's businec^-^ was 
then shown as given below (for convenience round numbers 
are used, each figure representing $1000. The accountant 
explained that the factory operations started with a rush in 
January, on material purchased the preceding month but 
billed in January. Some overtime was made in that month. 
By February the work reached a steady gait, which con- 
tinued until July when there was a slight falling off for two 
months. On Sept. 1, a great depression of business began, 
which caused the shutting down of most of the factory- for 
three months in order to reduce stocks. Dec. 1st the fac- 
tory started again at nearly its normal rate. 





Statistical Sheet— Manufacturing Accpunts 






1 
J 




6 






CQ 










^ 1 






a 












CU 














20 


1 

1 

6 


o 

1 

i 
1 

14 




§ 
g 


73 

a 

3 

21 


£ 
^ 

S 
^ 


s 

3 




§ 

C 

5 


■r 

2 
28 


2 

t 

c 

20 




Jan. 


6 


Feb. 


10 


5 


19 






17 




5 




4 


22 


20 


to 


Mar. 


6 


4 


21 






16 




7 




3 






M 


April 


6 


4 


23 






16 




8 




2 






13 


May 


6 


4 


25 


6 




16 




9 




2 






15 


June 


6 


4 


27 






16 




10 




2 






17 


July 


5 


4 


28 






15 




11 




2 






18 


Aug. 


4 


4 


28 






14 




12 




2 






19 


Tot. for 




























8 mo. 


63 


35 




48 


48 








20 


22 








Sept. 


4 


3 


29 


1 


2 


6 


5 


13 


1 


2 


8 14 


13 


Oct. 


1 


2 


28 


I 


2 


5 


3 


15 


1 


2 


6 1 10 


9 


Nov. 


4 


2 


30 


1 


2 


5 


6 


14 


1 


2 


9 


6 


12 


Dec. 


6 


6 


30 


5 


6 


17 


11 


20 


2 


3 


16 


8 


20 


Total 




























12 m. 


78 


48 


30 


56 


60 


164 


144 


20 


25 


31 


200 


180 


20 


Total 




























4 m. 


15 


13 




8 


12 








5 


9 









The Auditor's Comments 

After examining the Code and the statistics the auditor 
said "This is all right with one exception, the addition of the 
supplementary burden rate to the valuation of the worked 
material in store and of the finished product in the ware- 
house. During the first eight months the direct labor cost 
of worked material was 48 (units of $1000 each) and of fin- 
ishing 20, total, 68 units, while the burden for the same 
period was 48 plus 22 equals 70, the burden being practically 
100 per cent of the labor cost. In the next three months the 
total direct labor cost was 6 and the burden 12, or 200 per 
cent of the direct labor cost. By charging into the inventory 
value of such of the goods as remain of those produced during 
these three months you have overvalued them and so increased 
the apparent profits of the year's business. Suppose that 
during these three months the manufacturing departments 



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FACTORY ACCOUNTING 



47 



had been entirely shut down and no goods were produced. 
The greater part of the burden would still be running on, 
costing say 8 or 10 units. You could not charge that to cost 
of goods if none were produced; you would have to charge it 
to Profit and Loss, or else let it remain in Burden Account to 
be charged wrongly to the cost of goods made in succeeding 
months. This supplementary burden, due to the partial 
idleness of the factory, should not be charged to the cost or 
inventory value of the goods produced, but to Profit and Loss. 
It is not a cost of production but a cost of idleness and non- 
production. 

"It appears from the statistics," continued the auditor, 
"that if the product of the last four months, costing 8 plus 
5 equals 13 units for direct labor, had been charged with the 
normal rate of burden, the burden would have been only 13 
units instead of 12 plus 9 equals 21 units. There is, there- 
fore, an overcharge of cost of $4000 for worked mat-erial and 
S4000 for finished product, a total of S8000. Much of this 
overvaluation appears in the inventory of goods on hand, 
a large proportion of which consists of the over-costed goods 
made during the three dull months. An examination of the 
perpetual inventory cards shows that the over-valuation in 
the inventory amounts to about S2000 in worked material 
and $2000 in finished product. The following entry should, 
therefore, be made: 



Profit Loss To Sundries 


4000 




For over-valuations in inventory 






To Mfg. a/c. 




2000 


To Mdse. 




2000 



In regard to the second query of the auditor, relating to 
the $1000 charged as depreciation of Real Estate and Equip- 
ment Account, and to the fourth query, relating to remaining 
asset values of some of the charges to Mfg. Acct. the account- 
ant explained that the Inventory Book showed that a depre- 
ciation of 2 per cent or $500 had been assessed on Real Estate, 
$25,000, and 4 per cent or $1000 on Machinery, $25,000, but 
that $500 had been added to machinery and credited to Mfg. 
Acct. for betterments to machinery and equipment, in the 
addition to it of certain patterns and small tools, which had a 
present value estimated at $500. This reduced the total 
depreciation of Real Estate and Equipment to $1000. 

The auditor agreed to this, but said that while 4 per cent 
was, no doubt, a sufficient allowance for the actual deprecia- 
tion of the machinery below its cost value, an additional sum 
should be deducted as a Reserve Depreciation against obsoles- 
cence which might take place in the next ten or twenty years. 
He recommended that an additional 4 per cent be allowed for 
this. The Real Estate and Equipment account would then 
stand as follows: 



Original Cost, Land and Buildings 

Machinery 
Additions to Machineiy 


500 
1000 
1000 


25,000 

25.000 

500 


Depreciation on land and buildings, 2% 
Depreciation on Machinery, 4% 
Reserve for obeoleacence. 4% 


50,500 
2,500 


DifTcTonce 




48.000 



There are different ways of treating depreciation in the 
books, the auditor said, but he preferred to keep Real Estate 
and Equipment Account at its full value to the business as a 
"going concern," in this case at $50,500 and since the depre- 
ciation was not actual, but only theoretical, the machinery 
being as good as, if not better, than new, it had better be 
kept in a separate account, called Reserve for Depreciation, 
and it will appear there as a credit, offsetting the debit balance 
of Real Estate and Equipment, and reducing the credit of 
Profit and Loss account, or Surplus Account, into which the 
credit balance of Profit and Loss will ultimately be closed. 

For the additions to machinery, estimated on the inventory 
at $500 present value no entry has hitherto been made, and 
the amount has been hidden in the general ledger in the charge 
to Mfg. Acct. and in the factory cost accounts in numerous 
charges to Repairs or General Expense which cannot be sep- 
arated. Since Mfg. has been closed, except as to the inven- 
tory balance of $50,000 the only proper way to get the $500 
additional value into Real Estate and Equipment Acct. is to 
credit it to Profit and Loss. 

The following journal entries should, therefore, be made: 



Real Estate and Equipment 
To Profit and Loss 

Cancelling former entry of de- 
preciation 
Betterments to machinery, 
see inventory 


1000 
500 


500 
1000 
1000 


1500 
2500 


1500 


Profit and Loss 

To Reserve for Depreciation: 
Est. Dep'n on Buildings 2% or 
Est. Dep'n on Machimiry, 4% or 
Est. Dep'n for Obsolescence, 4% 


25.000 
25,000 


2500 



As to the third query, relating to Sales Expense, the book- 
keeper showed that of the $10,000 charged to the account 
$3000 had been incurred for publication of a catalogue, and 
that $2000 of it might properly be considered as the present 
value of it, as a new catalogue would not be needed for sev- 
eral years. Also $2000 had been spent in traveUng and other 
expenses in establishing agencies and in doing advance 
advertising, which expense was for the benefit of the busi- 
ness of future years. The auditor agreed that the entry 
which had charged the whole of Sales Expense to Profit and 
Loss should be amended by a counter entry, as below: 



Sales Expense 




3000 




To Profit and Loss 








for present value of expenses in- 








curred by Sales Dept., vis.: 








Catalogue 


2000 






Establishing Agencies 


1000 




3000 









This would leave Sales Expense with a debit balance of $3000, 
representing an asset which would be gradually written oflf 
in the next two or three years. 

When all these correcting entries are posted the trial bal- 
ance will be changed in the following items: 



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BOOKKEEPING AND COST ACCOUNTING 





Dr. 


Cr. 


Real Estate and Equipment 


1.500 




Profit and Lobb 


2,500 


1.500 


Profit and Loaa 


4.000 


3,000 


Reserve for Depreciation 




2.500 


Manufacturing Acct. 




2,000 


Mercbandiae 




2,000 


Sales Expense 


3,000 




Suspense Acct. 


1,000 




Accts. Receivable 




1.000 




12.000 


12,000 



An Income or Profit and Loss Statement may now be 
prepared for the information of the stockholders as fol- 
lows: 



The balance of Profit and Loss is now reduced to $22,400 
and against this is a charge of SIOOO to Suspense Account 
which may ultimately prove to be a bad debt. 

There is a contingent liability in regard to $10,000 worth 
of discounted notes receivable which have the company's 
endorsement. No account of these appears in the books, 
except in the form of memorandums in the BiUs Receivable 
book, but they should be taken into consideration before 
declaring a dividend. The liability on them can be insured 
against, and a reserve of $2000 against it will probably be 
ample. Deducting these two amounts $1000 and $2000 from 
$18,400 leaves $15,400 as applicable to Dividends and Surplus. 

As to the amount that should be divided among the 
stockholders it should always be borne in mind that a suc- 
cessful business is a growing business and one with increasing 
capital and surplus. A business that does not grow is suf- 
fering from "dry rot" and unless something happens to 
rejuvenate it it will ultimately fail. It is difficult to get new 
capital for a business that is not growing. Therefore it is 
most important that net earnings in normal business years 
should not all be divided, but that a considerable portion 
should be retained in order to increase the surplus and pro- 
vide for future growth, and also in order to provide a fund to 
maintain regular dividends in times of depression. 

In this case an 8 per cent di\ddend would appear to be about 
right. If checks are drawn for this dividend the following 
entries may be made and posted. 



Profit and Loss To Sundries 


22.400 




To close P. & L. acct. for tbe year: 






To Dividend, 8% 




8,000 


To Surplus 




14.400 


Dividend 


8.000 




To Cash 




8.000 



The trial balance now becomes a statement of Assets and 
Liabilities as below: 



Assets 




Liabilities 




Cash 


12,000 


Capital Stock 


100.000 


Real Est. A Equip. 


50,000 


Surplus 


14.000 


Office Furniture 


400 


BiUs Payable 


30,000 


Bills Receivable 


5.000 


Accts. Payable 


15.000 


Accts. Receivable 


24,000 


Reserve for Dep'n. 


2.500 


Mfg. Acct. 


48.000 






Mdse. 


18,000 






Sales Expense 


3.000 






Suspense 


1.000 








161,900 


161.900 



Income from Sales 






215.000 


Less Charges to Sales Exp. 




10.000 




Deduct Catalogue and other ex- 








penses chargeable to next year't 




3.000 


7.000 


business 












208,000 


Net Income from Sales 








Cost of Sales: 








Charges to Mfg. a ^c. 




250.000 




Add Depreciations 




2,600 






252.000 




Credits: 








Machinery betterment 


500 






Inventory: 








Raw Mat'l. 


30.000 






Worked Mat'l. 


18.000 






Finished 


18.000 


66.500 


196.100 


Profit on Sales 






21.900 


Profit on Interest 






500 


Total Profits 


22,400 


Dividend 8% 






8.000 


Surplus 


14.400 



Against this Surplus there is a Suspense Acct. of $1000 for 
a possible bad debt, and a contingent liability on $10,000 
worth of endorsed paper. 



Error Due to Keeping Overhead Percentage 
Uniform 

Some years ago, the president of a bridge company told me 
one day that he could not understand why his actual earnings 
fell so far short of his estimates. He stated that he knew the 
material charge was correct, that he had considerably reduced 
his direct labor by introducing piece work, etc., and that he 
was figuring his overhead at the same per cent he always had, 
and yet his actual earnings came over $100,000 short of his esti- 
mates. I rather surprised him by telling him that he himself 
had told me the cause of the difference, namely the reduction of 
his direct labor, and distributing his overhead at the same per- 
centage of the reduced amoimt as he had used before the reduc- 
tion. For instance, assuming a labor cost of $100 and overhead 
of $100, the overhead would of course be 100 per cent. Now if 
you reduce the labor cost to $80 and the overhead remains $100. 
and yet you only distribute 100 per cent or $80, you have S20 
remaining undistributed. I told him to divide his overhead for 
a given time by the tonnage produced in that time which would 
give the unit cost of overhead per ton to be multiplied by the 
number of tons in the particular order under consideration. The 
next time I met him he told me I had solved his problem. It 
is an actual example showing how we may be led astray by follow- 
ing the same old way of doing things without giving proper con- 
sideration to the subject. — Gershom Smith, Eng. Mag,f June, 
1909. 



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CHAPTER VI 
COST ACCOUNTING 



Factory Costs* A finished product in a factory making 
metal goods sometimes consists of a single piece, such as a 
casting, on which very little work is done, but usually it con- 
sists of many pieces, each one of which may have from one 
to six or more operations done on it, which are "assembled" 
or fastened together, first into groups of two or more pieces 
with their fasteners, and then the groups are assembled into 
the finished product, so called, which later may be plated, 
lacquered or otherwise "finished." 

A "piece" is a single bit of metal — ^it may be a casting of 
iron or brass, or be punched or stamped from sheet metal, 
or cut from a rod. Anything done to it, by a machine or by 
hand, which causes it to progress from raw material toward 
finished product is called an "operation." 

An " operation " is usually a work of one kind, such as 
drilling a hole or series of holes, or cutting a groove or two or 
more grooves, on one piece or on any number of pieces of the 
same kind and shape, and it is usually done by one man on 
one machine, but sometimes it is done by a man with a 
helper or two, on two or more machines, such as a blacksmith 
with a heater and a helper, heating, rough forging, die forging 
and trimming, the whole being classed on a single " work 
order " as one operation, whether it is done on one piece or 
on ten thousand pieces of the same kind. 

Each kind, variety and size of finished product has a selling 
price, per single article, per dozen, hundred, gross or thou- 
sand, which may vary with market conditions. 

The selling price is supposed to cover factory cost, selling 
expense and profit, but as the selling price may be governed 
by competition and as the factory cost or the selling expense, 
or both, may be abnormally high, relatively to the selling 
price, the profit may be turned into a loss. 

In this treatise, only factory costs are considered, the selling 
expense and the selling price being matters that concern the 
Sales Department and the General Management. 

The Factory Cost of the whole annual product covers the 
raw material, less the value of scrap returned from any of 
the operations, the Direct Labor, the Indirect Labor, includ- 
ing salaries, fuel and other supplies, repairs, depreciation and 
every other kind of expense " burden " or " overhead " 
that is related to the turning out of product. It does not 
properly include the cost of breakdowns that cause shutting 
down of the factory for any long period of time, nor losses 
of work or of profit caused by such breakdowns, nor losses 
due to idleness caused by fires, by business depressions, by 
strikes, by inefficiency of the sales department, or by a por- 
tion of the product becoming obsolete or out of fashion. 



These are business losses and not factory losses; and they 
may be covered by an insurance fund, the annual contribu- 
tion to which should be considered by the Sales Department 
in fixing selling prices, or deducted from the surplus out of 
which dividends are declared. 

The Factory Cost of the whole annual product, thus 
defined, may be obtained by the Accounting Department by 
the ordinary methods of bookkeeping, and when the product 
of the factory is a single kind of article, such as pig iron, or 
flour, or cloth, or automobiles of one size and style, the cost 
price per ton, or per barrel, or per yard, or per piece, may 
easily be determined month by month, but when the product 
is of many kinds and sizes and the operations on different 
parts, from raw material to finished product take place in 
different months the determination of the " unit cost " of 
each kind is a matter of great difficulty. When the number 
of varieties runs into thousands, and the number of opera- 
tions into tens of thousands all ordinary accounting systems 
utterly fail even to approximate real factory costs of individ- 
ual articles. 

The best solution of the complex problem of obtaining 
unit factory costs is to divorce the Accounting Department 
from the Cost Department, and have the latter determine 
costs by an independent method. 

A new definition of Factory Cost is now needed. It is not 
postrmortem cost, what the goods cost last year, but what it 
now costs to reproduce them, or what they wiU probably cost 
during the remainder of the current year, assuming that the 
factory runs at a normal average rate. 

What the management needs to know is the costs that can 
be used as a basis for fixing the minimum selling price, as a 
basis for inventory values from which profits and losses 
are computed; as a basis for comparison of posts of similar 
articles of different sizes or grades, or of the same article at 
different times; as an index of the efficiency of the factory 
management; and as a guide in determining whether to 
abandon the manufacture of some parts of the product and 
to push the sale of other parts. 

Accounting versus Cost Keeping. Accounting has to do with 
payments of bills; classification of expenditiu^es; changing 
records of assets and liabilities; inventories; gross and net profit; 
credits, finances, bank relations, notes. 

The cost system takes hold where accounting leaves off. It 
has in common with accounting only two things — the use of the 
same set of figures of expenditiues, and the value of the accoimt- 
ing as a means of proof. It deals with internal affairs only — 
accounting with external. 

The cost system demands a somewhat different experience 



49 



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BOOKKEEPING AND COST ACCOUNTING 



and different training than does accounting. Accountants have 
mistaken form for substance. 

No business is made a success by systems alone. Success is 
due to policies, energy, enthusiasm, work and sagacity. 

The best way to build a cost system is from the totals down 
to the details, and not from the details up to the totals. Start 
with the totals of the three general elements, material, labor and 
expense, as proven with the accounting. Divide into sub-totals 
and then into still other subdivisions.* 

It takes in a plant of any size from one to two years to build a 
good cost system, because so much human nature is involved, f 
B. A. Franklin, Eng. Mag., vol. 43, p. 705. 

STARTING A COST ACCOUNTING SYSTEM 

The Stores System. In organizing a complete cost 
system in a factory making a variety of products the first 
thing to be done is to establish a stores system, and to keep 
an accurate record of all materials and supplies purchased 
and of all given out to the shops. There should be a place 
for everything and everything in its place, whether the place 
be a bin, shelf or hook in the storehouse itself, or a pile in the 
yard, or on the floor of the factory. The storekeeper is to 
be held responsible for all material and for keeping record of 
it, until he is relieved of responsibility by turning it over to 
the foremen of departments either on general or standing 
orders, or on written orders, or requisitions, or stores issue 
tickets for special jobs. A continuous or perpetual inven- 
tory, or " balance of stores " record, should be kept, prefer- 
ably on cards, and it is advisable to supplement these with 
bin cards on the bins in which the materials are kept. The 
minuteness of detail of these records is a question for the 
management to settle. Care must be taken not to let the 
stores system be overburdened with red tape, which costs 
more than it is worth. All direct material, that is raw or 
partly worked material that enters into the finished product, 
must be charged on individual stores issue tickets or job 
tickets, but minor supplies for the departments may be 
lumped together in many cajses and charged monthly to 
department burdens. 

Labor Charges. The next important thing in cost 
accounting is to make provision for charging all direct labor 
to the job on which it is employed. The best means for 
doing this is the job ticket. 

Direct material and direct labor thus being charged to 

*Thi8 needs some explanation. If "to build a system" means 
to prepare a scheme for the system, we may build down from the 
totals to the details as stated, thus: 

Total Expenditure: 

Material; Labor; Expense; 

Distribute to Departments or to Classes of Products; 

Subdivide into Costs of Individual Products. 

But in using a cost system we build up from details to totals, thus: 

Stores issue Tickets; Time Cards; Bills for expenses. 
Allocation of Expense Burden to the Machine-hour Costs. 
Cost summaries of Parts or Pieces. 
Cost of Groups and of Products. 
Totals by Classes. 
Grand Total. 

t " EIngineering is the science and art of overcoming the resistances 
of nature — including human nature." — W. K. 



individual jobs, we obtain the prime cost, which, in many 
businesses, is considered sufficient for all practical require- 
ments, but in all factories in which the burden is an important 
fraction of the total cost, and .especially in factories ha\ing 
more than one department, the proper distribution of the 
burden is fully as important as the accurate recording of 
prime costs. 

FACTORY ORDERS 

Factory orders may be divided into several classes: 

1. Standing Orders. These need not be in writing, but 
are taken for granted, such as " Keep factory clean "; ** Tool 
room, grind all tools sent in from the shops, as directed by 
the foreman "; " Blacksmith shop, forge all tools as required 
by tool room; do all repair work required by department 
foremen." 

A list of such orders with their appropriate symbols should 
be kept in the counting room and on the desks of the foremen 
or department clerks, so that when labor or expense tickets 
are made out for work done on these orders the proper charge 
symbol may be written on them. 

2. Office Orders, issued either by the general office or by 
the factory office for certain work to be done, the details 
of which will be arranged by the planning department. 
"Example: Make 12 engines, Class E9 for stock. Deliver 
in warehouse within three months." 

3. Production Orders, made by the planning department, 
for work to be done in the several departments. Usually 
these are subdivisions of the 9ffice orders. Example: Foun- 
dry, make 12 cylinders, 12 pistons, 12 fljrwheels, 12 bed- 
plates, 24 bearing caps, from E9 patterns. Forge shop, make 
full set of forgings for 12E engines as per drawings. Main 
shop, do machine work on 12 engines E9, as per drawings. 

4. Job Orders, written on job tickets, subdivisions of 
Production Orders, specifying work to be done by one man 
or by a group of men using one machine or a group of ma- 
chines, or a bench or floor, on a single operation or on several 
operations in sequence, on one piece or on any number of 
pieces of the same kind. A job order is also written for the 
assembling of pieces into groups or into completed structures. 

The job ticket when issued should contain all the informa- 
tion concerning the job that may be needed by the foreman 
of the shop, and when completed it should have such addi- 
tional information as is required for the records of the Cost. 
Statistics and Accounting Departments. 

Small Orders. A large factory may receive as many as a 
hundred or more such triffing orders in a day, the total costing 
perhaps not over $25. Under old systems of management 
these gave a great deal of trouble to the foremen of the sev- 
eral departments on account of their interfering with regular 
work, and to the order clerk held responsible for " chasing 
them through the factory " and getting them shipped within 
a reasonable time. No attempt was made to record their 
costs and there was no check upon delays and wasted 
motions and consequent excessive costs of production. 
Under modem systems of management, with a planning 
room to issue orders to the several departments, small orders 



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COST ACCOUNTING 



51 



are executed promptly without interfering greatly with the 
regular work and records are made of every operation. 

In order to keep the clerical work down to a minimum a 
system should be devised after joint study by the head of 
the planning room, the chief cost clerk, the chief accountant 
and the superintendents of the several shops, by which the 
progress of such work through the shops will be made auto- 
matically without any " chasing," by which the least possible 
number of blank forms will have to be filled and handled, 
and the least amount of writing and bookkeeping done con- 
sistent with obtaining a complete record of every operation 
and its approximate cost. 

SUBDIVISIONS OF PAY ROLL 

Direct Labor. — Departments A, B, C, etc. 

Charged on job tickets to particular jobs on Pieces, Groups, 
Finished Goods, by Departments. The total dhrect labor 
on these tickets equals the total departments' direct labor 
pay rolls. 

Indirect Labor— Departments A, B, C, etc., and Expense 
Departments. 

TIME-KEEPmO 

The time may be kept on time books, time tickets (daily, 
weekly, or by jobs), or on the regular job tickets, which con- 
tain all the original entries both for time and for jobs. 

The time may be kept by any convenient method which is 
most suitable for the department. Thus, in the Power 
Plant where a man's job is the same from month to month, 
the time of each fireman would be entered each day in a 
time book, and the cost of firing labor would be entered only 
once a month, as the total of all the firemen's wages for the 
month. 

In the blacksmith shop some of the work would be direct 
labor, charged on job tickets to particular jobs, some work on 
standing orders, such as "Forge all tools as required by the 
Tool Room." " Repair all tools for the Power Plant." 
The daily time ticket may be found most suitable for this 
shop, with several lines on it showing by symbols the different 
jobs worked on in a day and the time required for each. 
Example: 



Time Ticket, 
No, of Wkm Name 


Blacksmith Shop 


Date 




Symbol 


Description of Work 


Hrs. 


Rate 


Amt. 


Symbol of 

Machine 

Used 


J 1017 
PPR 

TR 


Job order 

Repairs of tools for 

Power Plant 
Forging Tools for TR 

Total 


3J 
2 


1 

1 
! 






10 


35 


3.50 





The tickets for each day would first go to the pay-roll clerk, 
who would enter the time on the pay roll, then to the job 
clerk, who would sort the tickets by symbols, and at the end 
of the pay-roll period add up the hours and amounts for each 



symbol, take the total of the amount and compare it with 
the total pay roll of the shop. A Blacksmith Shop Labor 
Distribution Sheet is then made out which is used as needed 
by the Cost, Accounting and Statistics Departments. 

STORES ACCOUNT 

"Stores" in the factory ledger may include all raw mate- 
rials that are to be used in manufacture of the product, all 
partly worked materials that have been returned from the 
shop to the stores for safe-keeping until t-ney dre needed 
again in the shop for further operations, all finished parts, 
whether purchased or made in the shop, that are to be kept 
until they are to be assembled into finished products, also 
all supplies, such as fuel, small hand tools and other things 
that are, when issued to the several departments, to be 
charged to expense accounts; or, if desired, separate accounts 
may be opened for each class of these items, such as raw 
material, partly worked material, finished parts, fuel, sup- 
plies, etc. In the latter case numerous transfer entries are 
needed, as will be shown below, as the materials progress from 
one stage of work to another. 

The accounting will be simplified if all the materials for 
which the storekeeper is responsible are kept in one stores 
account in the General Factory Ledger, the subdivisions being 
taken care of in the continuous Inventory cards, which are 
properly classified. The work in progress through the shop, 
for which the department foremen are responsible, is kept 
in " Work in Process," or " Work in Shop," and the finished 
goods, ready for sale, under the care of the warehouseman 
are kept in " Finished Product " or " Warehouse " account. 

Suppose a production order is issued in an engine building 
shop for making for stock several engines of one class and 
size, and job tickets are made out for all the operations 
required. The order is not to be rushed through the shop, 
and as different parts are made or partly made, they may be 
kept in the store until needed for further operations or for 
assemblhig. As the work progresses the job tickets are 
returned from the shop first to the pay-roll clerk, and then to 
the cost and accounting clerk, who, after figuring up the cost 
for labor, material and burden on each ticket, and making 
the proper entries on the Piece Cost, Group Cost, and Fin- 
ished Product Cost cards, makes the monthly accounting 
entries from the statement of transactions given on the 
following page, which is made up from the adding machine 
totals of the job tickets for the month: 

Petty Stores. It is well to have an inflexible rule for 
the storekeeper that nothing is to be given out from the stores 
without an order, receipt or some sort of memorandum or 
check representing it. To lessen the work of accounting, 
however, such small items as cost only a few cents each, 
which are chargeable not directly to product but indirectly 
to burden, may be lumped together and charged to general 
burden or to departmental burdens at the end of each month. 
The memorandums as they are received may be filed in a 
box with numerous labeled partitions or pigeonholes, classified 
by departments or by the kinds of material issued, anti 
taken out and totaled at the end of the month. 



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Tramsactions 



BOOKKEEPING AND COST ACCOUNTING 

Journal Entries 





First Method 

1 


Second Method 


Work on $500 raw material, Labor $1000, Burden 
$1000 


Work in Process 
To Stores 
To Labor 
To Burden 


2500 


500 
1000 
1000 


Work in Process 
To Stores 
To Labor 
To Burden 


2500 

500 
1000 
1O0O 


Put $1200 of the product into stores, as partly worked 
material 


Partly worked material 
To Work in Process 


1200 


1200 


Stores 


1200 

1200 


Work on $100 raw material. $800 work in process in thr 
shop, $600 part worked material, $200 Labor, $200 
Burden. Put all in stores, as finished parts 


Fin. Parts 
To Stores 

To Work in Process 
To Part W.M. 
To Labor 
To Burden 


1900 


100 
800 
600 
200 
200 


Work in Process 
To Stores 
To Labor 
To Burden 


MOO 

700 
200 
200 




Stores 

To Work in Process 


- 1900 

1900 


Assembling Job, $50 R.M. from store, $200 work in 
Process in the shop. $400 Partly worked material 
from store, $1500 Finished parts, from store, $100 
Labor, $100 Burden. Put all in warehouse. 


Fin. Product 
To Stores 

To Work in Process 
To Partly worked matl. 
To Fin. Part* 
To Labor 
To Burden 


2350 


50 
200 
400 
1500 
100 
100 


Work in Process 
To Stores 
To Labor 
To Burden 


2150 

1950 
100 
100 




Fin. Product 
To Work in Process 


2350 

2350 



Journal Ledger 

First Method 
Credit Accta. 





Stores 


Labor 


Bur- 


Wk.in 


Part 


Fin. 


Fin. 


Total 


Debit 






den 


Proc. 


Wkd. 
Mat'l. 


Parts 


Prod. 


Dr. 


Wk. in P. 


500 


1000 


1000 










2500 


Pt. wkd. M. 








1200 








1200 


Fin. parts 


100 


200 


200 


800 


600 






1900 


Fin. prod. 


50 


100 


100 


200 


400 


1500 




2350 


Total Cr. 


650 


1300 


1300 


2200 


1000 


1500 




7950 


Dr. 








2500 


1200 


1900 


2350 


7950 


Dr. bal. 








300 


200 


400 


2350 


3250 


Cr. bal. 


650 


1300 


1300 










3250 



SxcoND Method 





Stores 


Labor 


Burden 


Wk.in 
Proc. 


Fin. 
Prod. 


Total 


Stores 
Wk. in P. 
Fin. Prod. 


3150 


1300 


1300 


3100 
2350 




3100 
5750 
2350 


Totals, Cr. 
Dr. 


3150 
3100 


1300 


1300 


5450 
5750 


2350 


11200 


Dr. bal. 
Cr. bal. 


50 


1300 


1300 


300 


2350 


2650 
2650 



Attention is called to the extreme simplicity of the second 
method. Not only are all the journal entries dispensed 
with, but the whole of the ledger work consists in entering 
on a printed blank only five figures, viz.: 3100, 3150, 1300, 
1300 and 2350, the totaling of the horizontal lines and the 
vertical columns, and the entering of the balances. The 



figure 3100 is the adding machine total of the entries on the 
job tickets of partly worked material and finished parts put 
in stoves; the figures 3150, 1300, 1300 are the totals of the 
entries on the job tickets of material of all kinds, raw, partly 
finished or finished, received from stores, and of labor and 
burden. The figure 2350 is the total of the entries on the 
assembly job tickets of finished goods delivered to the ware- 
house. The whole result of the operations is shown in the 
last two lines of the sheet. We have spent $1300 for labor, 
$1300 for burden and have reduced the store inventory 
$50, a total expenditure of $2650, and we have to show for 
it $300 increase of work in process and $2350 increase of 
finished goods in the warehouse. 

Valuation of Stores 

The best accounting uses costs as a basis. An increase in 
values in a thing still held is not profit. Profit cannot arise 
until a thing is sold. — ^W. M. Ck)le, Accounts, their Construc- 
tion and Interpretations, p. 159. 

A rigid adherence to this rule might lead to no end of con- 
fusion in the estimation of profits and losses in a manufac- 
turing business in times of violent fluctuations in market 
prices. 

Suppose a concern making electric motors in 1916 used in 
some of them an old stock of copper wire purchased in 1915 
at 25 cents a pound and in others used wire pur- 
chased at various dates in 1916 at prices advancing from 30 
to 40 cents. In taking an inventory January, 1917, shall 
the motors be valued at different costs depending upon the 
date at which the wire in them was bought, or shall they all 
be valued on the basis of the latest market price of ^ire? 
It is well generally *' not to count chickens before they are 
hatched," and to err, if at all, on the safe side in fixing inven- 
tory values, but in such a case as the one above men- 
tioned a profit does arise before a sale is made. The cost that 



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COST ACCOUNTING 



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should be used in taking an inventory, and in fixing a base 
on which to figure the minimum selling price, is not the 
post mortem cost, but the present estimated cost of repro- 
duction, based on present costs of material and labor. The 
advance in market values of material in stores, or of finished 
goods in the warehouse in 1916 should be credited to Profit 
and Loss, of 1916, when the inventory of January 1, 1917, is 
taken; otherwise when they are sold at high prices later the 
business of 1917 will show a greater profit than was really 
made in that year. 

In the Profit and Loss statement of 1916 the fact should be 
recorded that the gross profit was not all due to manufacturing 
but that some of it was due to advance in values of raw mate- 
rial, and the fact thus recorded should be considered before 
declaring a dividend. 

The same material may sometimes be transferred back 
and forth several times between the stores and the shop, so 
that the monthly totals of Stores Account and the Work in 
Process account do not show a record either of business 
transactions or of the amount of work done in the shop, the 
entries being mostly of transfers of material from one place 
to another. The balances of the two accounts added together 
show the cost values of all the material, raw or partly finished, 
and the balance of Finished Product (or Warehouse Account) 
shows the cost value of products on hand and ready for ship- 
ment. The entry Stores to Accounts Payable * is a business 
record of monthly purchases, the entry Finished Product to 
Stores and to Works in Process is a factory record of the 
amount of goods finished during the month, and the entry 
Sales Account to Finished Product is a business record of 
the cost value of the goods shipped. 

Inventory of Warehouse and Stores 

Suppose a concern makes an annual product costing 
$200,000, and that one-half of the total product is on hand 
at the end of the year, estimated to have cost $100,000. 

The $200,000 cost of product is made up of material 
$80,000; Labor, $55,000; Burden, $65,000, and on account 
of the burden on all portions of the product being figured on 
the uniform percentage of labor basis it is estimated that 
one-half of the product, costing $40,000 for material and 
$27,500 for labor should have half of the total burden appor- 
tioned to it, making the total cost $100,000. But suppose 
that a more accurate method of apportioning burden should 
show that the $200,000 total cost should be distributed over 
three classes of product A, B and C, as follows: 



Now, when the inventory of half the product, costing 
$40,000 for material, is taken it may be found to consist of 
different proportions of il, 5, and C, giving rise to valuations 
that may differ widely from $100,000, for example: 





Material 


Labor 


Burden 


Total 


A 


20.000 
40.000 
20.000 


20.000 
20,000 
13.000 


30.000 
20.000 
15.000 


70.000 


B 


80.000 


C 


50,000 




80.000 


55.C03 


65,000 


200,000 





Material 


Labor 


Burden 


Total 


H of A, JB, and C. 
All of fi 


40.000 
40.000 
40.000 
40.000 
40,000 


27.500 
20.000 
35,000 
30.000 
25.000 


32.500 
20.000 
45.000 
40.000 
25.000 


100.000 
80,000 


A and C 


120.000 


A^ndHB 

C and H B 


n 0.000 

90,000 



* Or Stores to Company (or Private Ledger) if the factory books 
are separate from the general or financial books. In this case the 
entry in the general books is Factory Operating Account to Ac- 
counts Payable. 



Showing a possible difference of $20,000 above or below the 
$100,000 valuation based on the common method of appor- 
tioning burden, or 20 per cent of the total annual cost of pro- 
duction. 

Inventory Valuations of Stores, of Partly Finished Work, 
and Products in Warehouse. The profit or loss of a busi- 
ness, as established by the books depends on the inventory 
valuations, and these will vary according to the theory 
upon which valuations are made, viz. : 

1. At cost as shown by the books. 

2. At the probable cost of reproduction. 

3. At the standard cost of a normal year or average of a 
five-year period, called " Record Costs " or " Five-year 
Standard Cost." 

4. At this standard cost plus or minus a percentage to cover 
advance or reduction in costs of labor, material or burden 
since the standard cost was recorded. 

5. At the market or selling price less a percentage esti- 
mated to cover normal selling costs and normal profit. In a 
business making a great variety of products. No. 5 will 
rarely give valuations that do not differ widely from factory 
costs, for it is practically impossible to apportion even 
approximately the total selling expenses to the different 
items of product. The valuations on Nos. 1, 2, 3 and 4 ba^es 
will depend largely upon the method of distributing the fac- 
tory burden. When the amount of the inventory is a large 
fraction of the total annual product an error in the method of 
distributing may lead to great errors in the inventory values, 
which, if they do not balance each other, may lead to dan- 
gerous conclusions in regard to profits on the business and 
as to the amount of dividend that may safely be declared. 

On this account it is advisable that the annual inventory, 
on which the yearly profits available for dividends are based, 
should be taken at a time of the year when the value of the 
goods in the warehouse and of the work in process is apt to 
be at its minimum, and when the error in the total of the 
inventory valuation is, therefore, also likely to be a minimum. 

Checking the Continuous Inventory 

If a continuous or " perpetual " inventory is kept on cards 
properly filed, or in a loose-leaf Balance of Stores Book, and 
is checked at frequent intervals by actual counting, measuring 
or weighing the goods, or stores, on hand, there is no need of 
shutting down the factory to take the annual inventor>'. 

Some system should be adopted to insure that each bin, or 



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54 



BOOKKEEPING AND COST ACCOUNTING 



other place for storing materials, should receive proper 
attention from the storekeeper's assistants, and that at least 
two or three times during the year its contents are inspected 
and compared with the balance shown on the bin card. As 
each bin is inspected, a memorandum, giving the symbol of 
the article, the quantity found in the bin, and the date, 
should be written and sent to the balance of stores clerk for 
comparison with his records. 

The best time to inspect a bin, and check the bin card, is 
when it is empty or nearly empty. If the inspector tacks a 
small card, of a different color for each month of the year, 
on each bin, after he inspects it, he will have a continuous 
reminder, as often as he walks past it, of the time that has 
elapsed since the bin was last inspected. 

COST-KEEPING BY PIECES OF PAPER 

Modem bookkeeping and cost-keeping show a tendency 
to dispense with books, pens and ink, and laborious tran- 
scribing from one book to another and to use instead printed 
blanks, typewriters, adding and billing machines, and filing 
cases. Take the example of what is done in a shop building 
steam engines: 

(1) The general oflBce sends to the factory a printed blank 
with a typewritten order. " Build for stock twelve engmes 
Class A, size 10x12 in., date, March 1, 1916. Deliver in 
warehouse on or before July 1st." 

(2.) The Production Department takes from a pigeonhole 
or file case a mimeographed sheet headed Schedule £A, 
10X12 in. which contains a complete list of all the parts 
that go into such an engine, specifying for each part its name, 
symbol, size, drawing and pattern number or sjinbol, kind 
of metal, which also has colunms headed: Date ordered. 
From whom Ordered, Date to be delivered. Date received. 
It fills out in the proper column the number of individual 
pieces of each kind required for twelve engines, and sends it 
to the storekeeper, placing (1) in the " Unfilled orders " 
file. 

(3) The storekeeper takes from his inventory file the sheets 
of Balance of Stores that correspond to the piece symbols 
marked on the schedule that may be kept in stock, and enters 
on them the number of pieces that are to be reserved for this 
particular order and marks on the schedule in the colunm 
" from whom ordered " the words " in stock " or " in stock 
4, wanted 8 " (or as many as may be wanted), and returns 
the schedule to the Production Department. 

(4) The production clerk takes a lot of order blanks and 
writes in triplicate (using carbon paper) orders for the 
materials or finished parts (such as bolts) that are to be 
purchased from outside concerns, as shown by the schedule, 
stating the dates at which each lot of material is to be de- 
livered to the factory, and sends these orders to the Pur- 
chasing Agent. 

(5) The production clerk takes from another file blanks 
for factory production orders for each piece or lot of pieces 
of one kind to be made. As these pieces have been stand- 
ardized as to patterns and operations the blanks may be 
printed or mimeographed with all details, and require to 
have written in ink only the date of issue, serial numbers 



of the oflSce and factory orders, number of pieces to be made, 
and date foi delivering to the storeroom or assembling floor. 

(6) Job tickets are then made out for each operation or 
group of operations to be performed by one man, corre- 
sponding to each of the several production orders. These 
tickets may be so printed as to serve several distinct functions, 
viz.: (a) an order on the storekeeper for the material, a 
pa>Toll record showing the date at which the operation was 
performed, the time of the man and of the machine, his 
wages or piece work payment, and the machine or other 
burden, thus making the job ticket also a cost ticket for the 
operation. It may have a move coupon attached to be 
given to the " move man," containing an order to move the 
piece or pieces to the next machine, to the storeroom, or to 
the assembling-room floor. 

The job ticket is the mast important element in the modem 
cost system of factories that make an " assembled " product. 
The job tickets may be made out, or partly made out, long 
in advance of the time when they are needed, and put in a 
file on " jobs waiting assignment " until the time arrives for 
them to be put on the bulletin board of " jobs in factory- " 
and " jobs ahead." 

(7) Instruction cards corresponding to each job are on file 
and they go with the job ticket to the workman or are put on 
a board in the workroom for his inspection. 

(8) Bills begin to come in for the goods purchased. They 
take the regular course of verification and are then filed 
alphabetically in the file of " bills unpaid " or bills to be 
certified for payment. 

(9) The storekeeper or receiving clerk fiUs out a blank for 
each lot of goods received from outside parties, has it ap- 
proved, if required by the inspector of material, and sends it 
to the factory office where it is compared with the bill (8). 

(10) The cost clerk takes the blank (9) and enters on it the 
unit cost of each kind of material with a proper addition for 
freight, express, storage, depreciation, etc., if that is the 
custom of the factory, and sends it to the storekeeper or 
balance of stores clerk who enters it in his balance of stores 
sheets or perpetual inventory. 

(11) Monthly statements of the bills (8) come in at the 
beginning of the month; they are compared with the bills, 
and, if correct, are certified to the treasurer or cashier of the 
.company. If bills are to be paid promptly, in order to obtain 
prompt cash discounts, a statement is made out from the 
bills and certified for prompt pajTnent. 

(12) After the bills are paid they are arranged alpha- 
betically by names of dealers and in the order of dates for 
each dealer and filed permanently in the Paid Bills file. 

(13) The cashier pays the bills with voucher checks, 
that is ording.ry bank checks with the words " In payment of 
your bills of (date)" or statement of (date). Before the bills 
are filed, a rubber stamp legend (or a slip pasted on the bill) 
is filled out with the names of the account or accounts to 
which the bill is to be charged in the Accounts Payable Book. 

(14) The voucher checks are all entered in the Check 
Register, which in large concerns takes the place of the 
right-hand side of the Cash Book. 

(15) When the work of production is started in the factory 



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COST ACCOUNTING 



55 



the job ticket is sent to the storekeeper as a warrant for his 
issuing the material that it calls for, or else a Requisition 
is made for it. This requisition to be returned to the cost 
clerk, or a separate bill is to be made for the material deliv- 
ered with the price at which the material is to be charged to 
the job. The bill is to be charged on the job tickets and 
credited on the stores inventory. 

(16) If any material that has been charged to a job is 
returned to the stores, such as surplus material or scrap, a 
Credit Card is sent with it for entry in the Inventory and 
credit on the Job tickets. 

(17) Time tickets or job tickets are returned from the 
factory as the work progresses. They are sorted first to the 
names of the workmen, so that the Pay Roll may be made 
out, and then sorted by job numbers or symbols so that the 
cost of each job may be determined. The job totals are 
then added on the adding machine, together with the charges 
for burden, and the charges for material if they are on the 
job ticket. The sum of labor, burden and material on the 
job tickets for one week must equal the total of the jobs 
for the same period. The total of the burden figures is 
entered on the memorandum book of Distributed Burden. 

(18) The job tickets belonging to each piece or lot of pieces 
of the same kind are brought together, and when the piece, 
or lot of pieces, is finished and ready for debvery to the 
storeroom or to the assembly floor a Piece Cost Card is 
made out, giving date, piece symbol, number of pieces in 
the lot, average cost per piece for material, labor, burden 
and total. This cost card is sent to the storekeeper for 
entry in the Balance of Stores or Perpetual Inventory, after 
which it is filed permanently in the Piece (Dost file. The 
same cost card may be used at subsequent dates when other 
pieces of the same kind ai'e ordered. 

(19) When enough parts have been made so that " group 
assembling " may be begun (that is, putting together of cer- 
tain parts that belong together, such as " base and cylinder 
group/' " shaft group " or " governor group "), an assembly 
job ticket is made out, which serves as a requisition on the 
storekeeper for the pieces belonging to the group, and for a 
job and time ticket for the work of assembling. A similar 
assembly job ticket is made out for the assembling of the 
groups into complete engines and for the finishing of the 
engines for delivery to the warehouse. These tickets take 
the same course as that of the operation job tickets, described 
under (6), (17), and (18). 

(20) A Finished Product Cost Card (or Engine Cost Card) 
is made out from the information contained in the Piece 
Cost Cards and in the Assembly Job Tickets, giving the cost 
of the engines complete. This is entered in the Warehouse 
Inventory, and the card is placed in the file of costs of Fin- 
ished Product. 

The Cost System is now complete except as to the method 
of computing and distributing burden. It includes the 
filling out and handling of the following cards, sheets or 
other pieces of paper: 

1. Office Order. 

2. Schedule of Parts. 

3. Inventory or Balance of Stores. 



4. Orders for Materials. 

5. Factory Production Orders. 

6. Job Tickets for Operations. 

7. Instruction Cards. 

8. Bills for Goods Purchased. 

9. Blanks for Goods Received. 

10. Monthly Statement of Bills. 

11. Voucher Checks or Vouchers to be paid by the Gen- 

eral Office. 

13. Credit cards for material returned. 

14. Pay Rolls. 

15. Piece Cost Cards. 

16. Assembly Job Tickets. 

17. Engine Cost Cards. 

Besides these cards there are bound books that 
are connected with the system. 

18. Accounts Payable Book. 

19. Burden Distribution Book. 

20. Petty Cash Book for minor cash receipts and pay- 

ments by the factory. 

The Cash Book and Check Register are not included, as 
they are handled by the General Office and not by the 
factory office. 

Provided that the factory expense has been properly com- 
puted and distributed to the job tickets according to the 
method in use in the factory, the blanks have been properly 
filled out and that no arithmetical errors have been made, 
this system shows what was the cost of the engines and 
what was the cost of each piece and each operation on each 
piece. 

These blanks, however, are not all necessary for the account- 
ing system; many of them are required for administrative 
purposes, that is for getting the order systematically car- 
ried through the shop without any reference to costing 
or accounting. 

We may have the production department entirely separate 
from the cost department, the former being charged with 
the duty of getting the engines built within the prescribed 
time and the latter with the duty of reporting the costs. 
The blanks required by the two departments then would be: 

Production Department, 

(1) Office Order. 

(2) Schedule of Parts. 

(3) Inventory. 

(4) Orders for Materials. 

(5) Factory-production Orders. 

(6) Job Tickets for Operations. 

(7) Instruction Cards. 

(12) Requisitions on Storekeeper. 

(16) Assembly Job Tickets. 

(4a) Replacement orders for spoiled work. 

Cost Accounting Department. 
(3) Inventory (for prices of materials). 

(8) Bills for goods Purchased. 
(14) Pay Rolls. 



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56 



BOOKKEEPING AND COST ACCOUNTING 



(12) Requisitions on storekeeper. 

(For prices of materials delivered by storekeeper.) 

(13) Credit cards for materials returned. 
(15) Piece Cost Cards. 

(17) Engine Cost Cards. 

(19) Burden Distribution Book. 

(20) Petty Cash Book. 

The Accounts Payable Book (18), Monthly Statements 
(10), A^ouchers (11), and the Cash Book and Check Register 
are not included in either of these two lists, since they belong 
to the Financial Department. 

Limitation of the Cost Accountant 

With the above-mentioned seven blanks and three books 
properly filled out and filed the cost accountant is in position 
to answer any reasonable question that may be asked by the 
officers of the Company as to what was (f^ cost of the engines, 
of the parts, and of the operations, and also what is the 
recorded cost or inventory value of raw material or of fin- 
ished parts in stores. They give him all the data that are 
needed for this purpose. He is also in position to make such 
statistical sheets, reports or charts as may be required, 
giving monthly (or other periodical) total of expenditures for 



material, labor, supplies, or burden, and oomparisoDs of 
present costs with past costs or with standard or predeter- 
mined costs that may have been made by the drafting or plan- 
ning department. He is also able to say whether certain 
fluctuations in cost are due to changes in the market pric^ 
of materials or to changes in wages or burden. He may al» 
give to the financial department the figures to be entered 
in the monthly journal entries of the books of the general 
office for the purpose of '' tying the cost-books to the Gen* 
end Ledger.'' 

He is not able, however, to say that the costs that he reports 
are " true costs." They are true only to the extent that the 
theory and method of estimating depreciation and of dis- 
tributing burden are correct and true, which they never are, 
they are only approximations. 

The most accurate cost accounting system that deals with 
past events is but a historical record. It does not deal with 
the causes of these events, and it is not able to predict or to 
plan for future events. It cannot show that the unduly high 
cost of an engine was due to any kind of bad management in 
the planning room, to defective tools, to incompetent fore- 
men or unskillful workmen. These are matters for the man- 
agement to investigate after inspection of the cost account- 
ant's and statistician's figures. 



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CHAPTER VII 



COST-FINDING METHODS. USE OF THE JOB TICKET 



Time Tickets 

Time tickets may be made out on either one of the fol- 
lowing systems: 

1. One ticket per man per week, showmg all the jobs he 
works on during the week, with the time used on each job. 

2. One ticket per man per day, showing all the jobs the 
man worked on that day. 



3. One ticket per man for each job that is worked on that 
day. 

4. One ticket for each man for each job, whether it is done 
in a fraction of an hour, or whether it takes a whole week. 
If the job runs over a week a continuation ticket is issued 
for each succeeding week. 

Combined Time and Job Ticket Form M 1 shows the two 
sides of a combined time and job ticket used by the Miller 



3 


Employe 


eNo. 




813 


Order 


11 


1 








^**- 1200 


JolinDoe 


Week Ending 

i2/e/i5 




Lc»ck 

No. IW 


Part 


Ud 


Opcfmtloa 


Trim 




Mach. 


Tool 


Forwnan's O.K. 

o 


3080 Unlcs 


Start 




Hoi 

2 


rs 
8 


; 

45.00 


Weighed by 


Stop 


42.2 


Foreman's O JL 


Lbt. 
Units 


Start 








Weighed by 


Stop 




Foremen't O.K. 

o 


Lbs. 
Units 


Surt 








Welshed by 


Stop 




Foreman't O.K. 


Lbs. 
Units 


Start 








Weighed by 


Stop 




Foreman's 0.1L 


Xbe. 
Units 


Start 








Weighed by 


Stop 




TOTAL 


2090 Units 


Total 
Hoars 


2 


8 


Code 
014 


RATE 


.08 


22 


PIECE 
WORK. 


VALUE 


81 


THIS SIDE UP FOR START AND STOP 







Morn. 
IN 


i 




1 


IN 






Noon 
OUT 


Noon 
OUT 






Mom. 
IN 


H 


Noon 
IN 






Noon 
OUT 


Night 
OUT 






Noon 
IN 


< 


Mom. 
IN 


45.03 




Night 
OUT 


Noon 
OUT 






IN 


i 


Noon 
IN 






OUT 


Night 
OUT 






IN 


1 


Morn. 
IN 






OUT 


Noon 
OUT 






IN 


e 

i 
1 


Noon 
IN 






OUT 


Night 
OUT 






IN 




Mora. 
IN 






OUT 


Noon 
OUT 






IN 




Noon 
IN 






OUT 


Night 
OUT 




THIS SIDE UP FOR 
IN AND OUT 



Form Ml. Combined Timb and Job Ticket. 



Lock Co. A card is used for each separate Job whether it 
lasts a fraction of an hour or runs over several days, but if the 
job is not finished at the end of the week the card is returned 
to the cost department and a new card is issued. While the 
work is in progress the card is kept at the desk of the foreman 
of the room in which the work is done. A time clock stamps 
the starting and stopping time on the front or job side of the 
card, and the in and out times are stamped on the other side, 
on which the days of the week are printed. The size of 
the card is 5) x3^ in. 

The clock registers hours and tenths. It runs backwards, 
starting at 55 o'clock at 7 a.m. Tuesday morning (the time- 
keeping week begins on Tuesday) registers 50.0 at noon, and 
also at 1 P.M., stopping during the noon hour, and 45.0 at 



6 P.M. and also on Wednesday at 7 a.m., stopping during the 
night. On Saturday it registers only 5 hours, from 15.0 to 
10.0, and on Monday 10 hours from 10.0 to 0.0. The time 
clock calculates the elapsed time by subtracting the " stop " 
from the " start " time. As shown in Fig. 3 which is 
John Doe's No. 3 card for the week, the job was started 
at 45.0 and stopped at 42.2, the elapsed time being 2.8 hours. 
On the other side of the card only one figure is shown, 45.0, 
the man's "in" time on Wednesday morning. His next 
job card No. 4 shows three time figures, noon out 40.0, noon 
in 40.0 and night out 35.0. 

The cards have large figures 1 to 10, printed on the upper 
left-hand comer to indicate the number of the jobs done by 
the man during the week, starting with No. 1 on Tuesday 



67 



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58 



BOOKKEEPING AND COST ACCOUNTING 



morning. Some cards are provided with the place for the 
figm^ left blank, to be filled in with ink in case a man has 
more than ten jobs in a week. 

Job cards of completed jobs are collected from the depart- 
ments twice a day. They are first filed in the pay-roll section 
of the cabinet where they accmnulate during the week. At 
the end of the week all job cards are collected, whether the 
jobs are finished or not. 

A certain bonus is given if a man does 50 per cent more 
than the standard set for the job. Thus, a man rated at 
$11 per week making 50 per cent more or $16.50 per week 
gets 48 cents bonus, making a total of $16.98. The bonus 



figure is derived from a formula and curve and is taken quickly 
from a revolving multiplication table. 

Weekly Pay Voucher. The job and time tickets of the 
Miller Lock Co. are summarized on a voucher sheet for each 
workman, which . is shown in an abridged form below. 
The size of the sheet is 9 by 12 in., and it contains some col- 
umns in addition to those here given, such as Estimated 
value per 100, Standard Product, Per cent of Standard, etc. 

In this factory the bonus is figured on the total weekly 
earnings and not on each separate job. John Doe is rated 
as an $11 a week man, or 20 cents per hour for 55 hours per 
week. On jobs 8 and 9 he was given this rate for day work, 



^"^3^3 ^""^ ^l^r^UO^ ,&0-€/ MILLER LOCK CO.. Weekly Pay Voucher 






















D.p'1. p/ D«yWirk %^^ 
<^ B.M ZLO m«.., 


^j: II. 5," "iizr^ l)jeA:/ (o.i^'S\ 






. , 1 


Job 

No. 


Lock 
No. 


Part 


Opcmtlon 


Quaority 
Unlta 


Rat* 


Houra 
on 
Job 


Rata 
Hoar 


NonProd. 
Day Work 


ProductlTre 
Day Work j[Plec« Work 


Disc. 
No. 




/(oO 


^cuU/ 


CO. 


t^l^-tJ^ 


fni 


JO 


s 




./f 












99 


3V^/ 




%l^ 


ft 


aMJU 


/ooo 


JO 


sf 




fio 










/ 


OO 






/(oO 


jCPyOcO 1 c^yt/i/yyi/ 


1O30 


.03 


X 


^ 


A^ 












^f 






fbo 


\ ^i^^uyyrU 


9000 


.OP. 


7 


2 


.5.5 










/ 


^o 






0./^ 


"^cuije^ 1 :^Uly 


UO 


JO 




2 


.no 












0¥ 






2Wv^' 


\ ^cn/^e/f^ 


^O cnAyydi/uiyiA/rUy 


■S/X(l 


.30 


? 


s- 


.30 






^ 


9¥ 






»' 




/:r^^ 


J^rrcr^ . 


JSHMIy 


2.f 


.ozs 


51 


f 


.SL¥ 












ro 








\J^yuUuL^^Jyi/'/^ 






.20 


7 


/ 


AO 


/ 


^% 










SZi 






^^ ^a^ ^ 


Ji^^i^a^^u/cVUrn/ 





.xo 


s 





.iLO 


/ 


00 










S¥C 




liu 


'^CUL.Z/ 


J^^JXfy 


/S'OO 


./O 


0? 


3 


.fi^ 










/ 


^o 


s/^ 




jy'^h 


Bt^-cx^y 


S^^x^jLb V- (Rjgya(j<yyU 


3(o 


.035 


3 


7 


.3^ 










/ 


eL6 


^ ,r 
































\ 








































Total 






S^O 




2. 


^^ 


2, 


9¥ 


^ 


0.0 




E*!a?, 


ifo^ 


Shonaga 
Reaaoa 


Am'ta 


Week 
Endlns 


fix 


Surplua 
Rcaaon 


Am'ta 


DcducUo 
For 


oa 

Affl*ta 


Total 
Day Work 


fL 


?^ 
























Raattt. 




so 


Total 
NooProd. 


SL 


^5, 




- 




















Duea 






Total 


/3 


S(o 
























Caah 






Bonoa 


/ 


1L^ 






























Total 
Wagea 


/V 


^^ 
























Scrap 










so 
























Surplua Paid 
Weak Eodlng 






Actual 
Wagea 


/V 


ZH 




Data Paid.-. .. _. Total 












Total 




SO 


Rec'd 



FoBM M2. Weekly Pay Vougheb. 



but on job 6 he was given a special rate of 30 cents per hour, 
possibly because that was the regular rate attached to that 
job. On the other job he received piece-work rates, as in 
the rate column, per piece, per himdred or. per thousand 
according to the job. At the end of the week his total 
earnings are figured up S13.56, and he is given a bonus of 
$1.28, which is 50 per cent of the excess of his earnings above 
$11.00 a week. 

This method is much easier for the accoimtant than one 
in which the bonus is computed on each job, and it may be 
satisfactory to the workman, and it may give the factory a 
close enough approximation to the labor cost of the several 
operations, but if accurate labor costs of any article or oper- 
ation are desired the apportionment of the SI. 28 bonus among 
the eleven jobs is a matter of some difficulty. The bonus 
<1.28 18 9.4 per cent of $13.56, the total weekly earnings; 



11.5 per cent of $11.14, the total productive work; and 

15.6 per cent of $8.20, the total productive piece work In 
figuring the labor cost, including bonus, on any job shall we 
add 9.4 per cent, 11.5 per cent, or 15.6 per cent to the cost, 
not including bonus; or, shall we consider each job by itself, 
and give it a bonus per hour of 50 per cent of the excess of the 
hourly rate earned, as in the rate column over the base rate 
of 20 cents per hour? Take jobs No. 2 and No. 11, for 
example. Was the total labor cost of No. 2 $1.00, with no 
bonus, or $1,094, $1,115 or $1,156? With the same per- 
centage additions, No. 11, $1.26, not including bonus, would 
cost $1,378, $1,405 or $1,457, but figured with a bonus of 
50 per cent of the excess of the hourly rate earned above 20 
cents per hour, the hourly rate would be 41 cents, and the 
cost 3.7 hoursX41 =$1,517. 

A bonus figured as a percentage added to the total weekly 



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COST-FINDING METHODS. USE OF THE JOB TICKET 



59 



piece-work earnings does not give a satisfactory basis either 
fixing piece rates or for the estimation of standard costs. 
Suppose that John Doe is equally skillful and equally ener- 
getic and faithful on both of the jobs No. 2 and No. 11, and 
that he was fairly entitled to earn $15 per week as an aver- 
age. If he worked a whole week, 55 hours, on job No. 2, 
making 11,000 units at 10 cents per 100, he would earn 20 
cents an hour, or $11.00, and would get no bonus, while, if 
he worked another whole week on job No. 11, making 535 
units, at $.05 each, or 55 hours at 34 cents air hour, $18.70, 
to which would be added a bonus of one-half the excess over 
$11.00, or $3.85, making his earnings for that week 55 hours 
at 41 cents an hour $22.55, or more than double what he 
received for the other week. 

The chief cost accountant, or cost analyzer, on glancing 
over this weekly pay voucher should make a memorandum 
for his " Tickler " " John Doe, Dec. 6, 1915, earns only 20 
cents per hour drilling 214 case, and 41 cents per hour drilling 
and reaming S. T. P. 0. door. Why? " and at a convenient 
time hand this memorandum and other similar ones to a 
cost clerk, who would first find by examining other pay 
vouchers or job tickets for 214 case and S. T. P. 0. Door, 
whether the conditions noted were chronic or only accidental 
and unusual. If chronic, the rate fixer should be informed, 
and he would investigate and report whether or not the estab- 
lished piece rates for these two operations were the proper 
ones, and whether or not a time study with the aid of a stop 
watch should be made in order to correct them. 

Workman's Yearly Record. The total hpurs and earn- 
ings on the Weekly Pay Voucher are entered on a Yearly 



NMn« John Doc 



D. W. Rate 20 Spec. 80 Bono R«te 



Sex 



Ag« 23 



Nat. A. 



Total Hr». 191* Wag— i7«» Avf. par Hr. 26 



^ ^otal Hr«. 



Avar. pafWk. 18.75 



"/• 



P.W. D.W. 



Who 
KcectTvd 



P.W. Rata 



Sax 



Form M3. Workman's Yearly Record 

Record Sheet, as shown in Form M3. There are two sets of 
headings on each sheet, and 54 ruled and numbered lines, 
so as to give room for a two-year record on one sheet. The 
sheets are bound together in a loose-leaf binder. 

Most of the work in this factory is piece work, and more 
than 20,000 piece rates have been established. They are 
entered on cards which are kept in filing boxes. Burden rates 
are apportioned on productive wages — a standard burden. 
The difference between the monthly total burden on the 
general books and the sum of the burdens apportioned to 
jobs is charged or credited to Profit and Loss each month. 
There is no supplementary rate. Business and adminis- 
tration expenses are entirely separate from shop costs. 

There is no inventory period — a perpetual inventory is kept. 

Material is charged at standard value each month, for 



simplicity. Apparently the material is a small part of the 
real cost of the product (except in the case of brass locks) 
and variations in market price of material make only slight 
variations in total cost. 

When the Workman Falls to Earn His Bonus, Does 
the Business Gain or Lose? Suppose that under the task 
and bonus system of paying wages a workman is paid 40 
cents per piece if he makes 10 pieces -in a day, but only 30 
cents per piece, the regular piece price, if he makes less than 
10 pieces. If he makes 10 pieces the labor cost of a day's 
work is S4, if he makes 9 pieces it is only $2.70. Suppose 
the factory expense is $4 per man per day, and that the 
selling cost is the same whether 9 pieces or 10 pieces are sold 
in a day, and that the selling price is $1.50 per piece. We 
may compute the profit on the day's work of the man, as 
follows: 



No. of 
Pieces 


Labor 
Cost 


Facfy 
Ezp. 


Fact'y 
Cost 


Selling 
Ezp. 


Total 
Cost 


Selling Price 


Profit 


10 
9 


4.00 
2.70 


4.00 
4.00 


8.00 
6.70 


4.00 
4.00 


12.00 
10.70 


10 at 1.50-15.00 
9at 1.50-13.50 


3.00 
2.80 






Increased profit when the workman earns bis bonus 


0.20 



But suppose the selling price is reduced to $1.30 per piece, 
the costs remaining as before, we now have 



No. of Pieces 


Total Cost 


SelUng Price 


Profit 


10 
9 


12.00 
10.70 


10 at 1.30 $13.00 
9at1.30 11.70 


$1.00 
1.00 



Showing equal profits^whether the workman earns his bonus 
or not. 
Suppose the price is reduced to $1.25 per piece, then 



No. of Pieces 


Total Cost 


SelUng Price 


Profit 


10 
9 


12.00 
10.70 


lOatl.25 12.50 
9 at 1.25 11.25 


0.50 
0.55 


Increased pn 


ofit when the worl 


kman fails to earn his bonufi 


0.05 



It thus appears that it is highly profitable to a concern to 
pay a high bonus rate when the margin of profit between the 
selling price and the total cost of an article is large, but that 
when the margin of profit is small the profits decrease when 
the bonus is earned. 

EXAMPLES m THE USE OF JOB TICKETS 

A direct labor job ticket contains the following informa- 
tion: Dept. A, Week ending Jan. 8, 1917, Workman's Name 
and No. 



Milling Connecting Rods, Piece E46. | 


Machine M13 


Credit 50 Hrs. at 30c. 


$15.00 




Move to M17 


Bonus 30% 


4.50 


19.50 


Enfd on Pay Roll WE. 


Material. 1000 lbs. forgings 






Ent'd on Store Inventory 


E46 at 4c. 




40.00 


SK. 


Burden 1000 lbs. at 0.2 c. 


2.00 




Enfd on Cost Card CL. 


50 hrs. Mach. 30c. 


15.00 




Pieces finished 19 


Job 


0.10 


17.10 


Pieces spoiled I 






76.60 


Ret'd to Stores — 






Ret'd to scrap, 50 lbs. 


Job finished 1/8. Approved, J. J., Foreman. | 


Cr. for scran 50 



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BOOKKEEPING AND COST ACCOUNTING 



The opposite side of the card will contain the time clock The entry made from the job ticket on the cost card iriD 
record and any remarks that may be made by the foreman. be as follows: 









Coax Card 








PiBCi E46 






Date 


Machine 


Matl. 


Labor 


Burden 


Totol 


Pea. fin. 


Spoiled 


Cr. for Scrap 


Coat per pc. 


Remarks 
Stondard Coat 


1/8/17 


M 13 


40.00 


19.50 


17.10 


76.60 


19 


1 


0.50 


4,01 


3.»3 



Additional entries on this cost card will be made for suc- 
ceeding operations on the same lot of pieces, and when they 
are iinished, the total cost, less the credit for scrap, is added 
up and divided by the number of pieces made to obtain the 
cost per piece. This, together with the number of pieces is 
entered on a perpetual inventory card. 

When the entries on the pay roll, inventory and cost cards 
have been made from all of the week's job tickets, the adding 
machine may be used to obtain either directly from the job 
tickets or from the cost cards the following totals. 

Machine hours; cost of labor; cost of materials; credit 
for scrap or for unused material returned to stock, and burden. 

The totals for four weeks give figures for the monthly 
bookkeeping and statistical entries. The total machine 
hours is entered on a card which shows the number of machine 
hours for different months in comparison with the estimated 
number of hours run in a normal month. This card, together 



with the monthly total material and labor costs, forms an 
index of the activity of the business. The monthly totals 
for labor, net material used, less scrap, and burden, are used 
for the monthly Journal entry, Work in Process Dr. to Labor, 
To Stores, To Burden. This entry may be subdivided and 
apportioned to different departments or classes of product if 
desired. 

After all the entries from the job tickets have been made, 
as above described, the tickets may be assorted by machine 
numbers, and the number of hours that each machine was 
engaged during the month footed up on the adding machine. 
The figures thus formed may be listed and compared with the 
number of hours that each machine is estimated to be engaged 
in a month of normal business, or with the full number of 
working hours in a month. The result expressed as a per- 
centage or " work-factor " may be used in estimating the 
" cost of idleness." 





Problem in Cost Finding 




Job TiCXST 


Job Ticket 


Dcpt. M. MacUne Work 


Back of Ticket 


Assembling 


Job No. 101. Wk. ending thura. 1-20-16 


Date 


Job No. 210 






Jan. 


Wk. ending 
Th. 1-27-16 


Piece Symbol A, Operation Symbol 


a 


Stop 


Pes. A, B. C 


Man No. 137 Name A. Smith 




14 Fri Surt 

15 8«t. Stop 

Start 


Part- Base A, B, C 


Mach. No. L13 




Man No. 107 A. Brown 








Hours Rate Amt 






Room L Bench 10 


5.2 .25 1.30 




17 Mon. Stop 6.0 


Urs, Rate Amt 


Premium 30% .39 


1.69 


Start 3.0 


4 >0 1.20 






18 Tu. Stop 9.2 


Prem. 20% .24 


Burden per far. 20 


1.04 2.73 


Start 7.0 




Material 


..^.1. 




1.44 


100 lbs. Caatinga 3c 


3.00 


19 We. Stop 
Start 


Burden. 






4 hn. at lOe .40 


Total inc. Matl. 


5.73 


20 Th. Stop 




Pieoec deUvered 20 




Start 


I.S4 


Pieoe« finiahed 19 






Pieces cost 


Pieoea rejected 1, acrap val. 


.03 




A 19 5.70 






Time 5.2 hours 


B 38 2.40 


Coat per piece 






C 57 1.80 9.90 


570 + 19 -30c, 


5.70 




11 74 
Av. cost 0.62 



Clerical Work on Tickets 
Planning Room. Make out tickets. 
Pay-roll Clerk. Enter in Pay roll. 
Cost Clerk. Enter all costs on cost ticket for Piece A. 
Enter all costs on cost ticket for Group A, B, C. 
Add up all labor charges entered on cost tickets for week 
and compare the total with pay roll total. 



Add up machine hours for each machine (sorting the job 
tickets for this purpose) and record the totals in machine 
record — as a basis for computing the normal burden. 

Add up burden charges entered on cost tickets for each 
week, and record weekly totals in Burden record. 

Add up material charges on cost tickets for the week, and 
compare total with storekeeper's record. 



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COST-FINDING METHODS. USE OF THE JOB TICKET 



61 



Sort the job tickets by Piece symbol (or Group sjrmbol for 
assembling tickets) and file them for comparison with future 
work on similar pieces. 

What is the cost of the clerical work per 100 tickets? 

How can this work be shortened to cut down its oost^ and 
yet put on record all necessary information? 

Information Written on the Job Ticket (1) Date 
issued. (2) Office Order No. (3) Class Letter. (4) Piece 
Symbol. (5) Description of Work. (6) Room No. (7) 
Machine No. (8) Workman^s No. (9) Workman's Name. 
(10) Rate, Piece or Day Work, or Bonus. (11) Man's 
Time. (12) Amount of Wages. (13) No. of Pieces. (14) 
Order on Storekeeper. (15) Material Delivered by Store- 
keeper. (16) Cost of Material. (17) Receipt of Finished 
Work by Stores or Foreman. (18) Memo, of Material or 
Scrap returned to Stores. (19) Burden. (20) Total Cost. 

(21) Cost per Piece (Material, Direct Labor, Burden, Total). 

(22) Order to Move Man. (23) Date of Finishing Order. 
(24) Bonus or Premium. (25) Man's earnings per hour. 

The Storekeeper's and Burden Records may be on 
separate cards if desired. A list of standard burdens for 
pieces, groups and assembled structures may be kept and 
added to labor and material costs in the inventory as they 
may be needed, as at the end of the year, instead of entering 
the burden on the job tickets. The entries to be made from 
job tickets include: 

1. Workman's Credit on Pay Roll. 

2. Such Statistics as may be needed by the Cost, Statistics 
or Accounting Depts. 

If the cards, after being entered on the Pay roll are sorted 
and filed by Piece Sjrmbols they form a complete cost system 
for unit costs, without any transcribing on books or cards. 
To find what any Piece has cost at different periods during 
the year, all that is necessary is to take out of the file all the 
cards relating to that piece. 

Total monthly costs, by classes, rooms, departments or 
machines may be found by sorting the cards by classes, etc., 
and adding up the totals on an adding machine. 

If the machine-rate burden method is not used the b||LU*den 



figures may be left off the cards, and the burden by Classes, 
Rooms or Departments may be computed from the monthly 
totals of hours and of labor by multiplying the hours by cents 
per hour, or the wages by the burden percentage, determined 
from previous records or recent investigations. 

The storekeeper's record may be omitted from the job 
tickets if it is not desired to keep detailed costs of material 
for each piece. 

Office Orders 

An Office Order is an order issued from the office to the 
shop, or to the planning room, for the execution of any kind 
of work, it may be for the making and shipping a single bolt, 
or for the making and putting into the warehouse a hundred 
or a thousand complete machines, each comprised of hundreds 
of pieces. The shop superintendent, or in modem practice 
the planning room, plans how the order is to be executed, 
and issues all the necessary shop orders for details of the 
work to be executed, drawings, instruction cards, and job 
tickets. The following is an example of an Office Order and 
of one of the job tickets which is part of the history of the 
execution and of the cost accoimting related to it. 

Office Order 7867. Mar. 16, 1916 

Symbol 

Bf 1-6 Forge 1000 steel bolts 1 X 6 in. square heads. 

B 1-6 Thread 500 of them, H in- of standard 

threads. 
B 1-6 sp. 12-2 Thread 100 of them, 2 in. special thread, 12 

per in. 
B 1-6 m Machine finish heads of 100 of the 500. 

B 1-6 ma Machine finish all over 100 of tlie 500. 

B 1-6 mp Polish and nickel plate 50 of B l-6m. 

When the order is finished there should be in the Inventory, 
400 bolt forgings, 1X6 in. 
300 threaded bolts, standard. 
100 threaded bolts, special threads. 
50 threaded bolts, machined heads. 
100 threaded bolts, machined all over. 
50 threaded bolts, nickel-plated heads. 
1000 



Date iflsaed. Mar. 16/16. 

Room No. Forte Maehine No. BF 4 

Clock No. 317 Name J Moran 

Work. Forge 1000 l"X6"Bolta. 



Operatioii Order or Job Ticket 

ClaM Letter B 
Ofiee Order No. 7867 
Hour or Pieoe Rate 0.60/100 
Pieoe Symbol Bf 1-6 



In 


Out 


Hour* 


Totol 


No. of Pas. 


Total 


Amount 




M 














Storekeeper. Deliver for this 
ofder 


T 














\" Round Steel 
1000 pos. 7H in. 


W 














Del'd. Date 3/16 


TI16.7 


10 


3.3 




160 






Pes. Wt. Price Amt. 


F 


10 


10 




590 






1000 1725 1.4 24.15 


8 


4.2 


4.2 


17.5 


250 


1000 


6.00 


Storekeeper's Punch X 


Wk. endmc 


Fin. 


Rate per 


Hour 


per pieee 60/100 


Bonus 






3/18 

















Earninss per hr. 600/17.5-34.3^ 
Cost per 100 pieces $3,365 



MaU 24.15 
Burden 3.50 
Total 33.65 
Excess Material Returned to Store lb. at Scrap, lb 



Burden Rat»-Maeh. 1 7 5 at 20^ 



Foreman's Punch O 
.at $. 



I f 

III. 

• s ^ 

8 

> 
O 




i^-^fi a 



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62 



BOOKKEEPING AND COST ACCOUNTING 



The symbolip are: 

B Steel bolt, square head, standard threading. 

Bf Bolt forging. 

1-6 I in. diam. 6 in. long below head. 

Sp. 12-2 Special, 12 threads per inch, 2 in length of thread. 

m 

ma 



mp 
BF4 



Machine-finish heads. 
Machine finish all over. 
Machined and plated heads. 
Bolt-forging machine, No. 4. 



Definition of " Job," The work done by one man, or by- 
one man and one or two helpers, on one kind of operation, one 
machine or other productive center, on one factory order, 
which may be for one or for any number of pieces and may 
take any length of time. If the time required runs beyond 
the end of the week a new job ticket is issued. 

Other operation orders for Office Order No. 7867 will be 
issued according to the following list: 





Piece 
Symbol 


No. of 
Pieces 


Material 
from 


Operation 


Mach 
No. 


Wages 
Perhr. 


Burden 
Per hr. 


I 

2 


B 1-6 

B 1-6 ap 12-2 


500 
100 


Forge Bf 1-6 
Forge Bf 1-6 


Cut threads 
Cut threads 


T 2 
L 14 


.20 
.30 


.50 
.20 


3 


B l-6m 


100 


Shop B 1-6 




M6 
L 10 


.25 
.25 


.30 
.20 


4 


B l-6ma 


too 


Shop B 1-6 


Mach. all over . 


M6 

L 10 
L 12 


.25 
.25 
.25 


.30 
.20 


5 


B l-6inp 


50 


Shop B l-6m 


Pol. and Plate | 


G. B. 

N 




.25 
2 50 



Operation (1) is done on a semi-automatic threading 
machine with low-priced labor. 



Operation (2) is done on a screw-cutting lathe by a^skilled 
workman. 

Operation (3) requires two machines, a miUing machine 
for the sides of the heads and a lathe, LIO, for the top and 
bottom of the heads. Separate tickets are made for the two 
operations if they are done by different men. 

Operation (4) requires the same machines, and another 
lathe may be used for turning the shanks. 

Operation (5) requires two machine operations, (a) grinding, 
(b) bufl^g or polishing, both before and after the plating, 
and the (c) plating operation, which includes several minor 
operations, such as cleaning, dipping, wiring, electroplating 
and drying, (a) and (6) may be done by one man whose time 
is recorded in the same way as in the machine shop, but the 
plating bath may contain portions of many different orders, 
and it is difficult to properly apportion the labor, material 
and burden cost of each. The work of the plating-room 
is, therefore, often lumped together as a part of general 
faetory expense, or else the foreman 
of the room, after studies of costs of 
plating goods of different sizes and sur- 
faces, makes up a schedule of prices to 
be charged for plating different classes 
of goods, just as if he were the owner of 
an independent outside shop doing work 
for different customers. In this case the 
plating cost is taken at 5 cents per bolt. 
When the operation on each Job Ticket 
is finished and the ticket returned to the 
Cost Clerk, he completes all the calcula- 
tions, entering the results on the ticket, 
and transfers the workman's credit to the Pay Roll, and the 
important cost figures to a Piece Cost Card as below: 



Piece Costs on Order 7867. Mar. 20. 1916 



Symbol 


Pieces 


Hours 


Rate 


Amt. 


Burden Rate 


Amt. 


Material 


Total 


Per 100 pes. 


Bf 1-6 


1000 


17.5 


34.3 


6.00 


.20 


3.50 


1725X1. 4(i 


24.15 


33.65 


3 365 


B 1-6 


500 


1.2 


20 


.24 


.50 


.60 


500X3.365 


16.83 


17.67 


3.534 


<S B l-6sp 12>2 


100 


9 


30 


2.70 


.20 


1.80 


100X3.37 


3.37 


7.87 


7.87 


n B 1^6m 
1 B l-6ma 


100 


{^ 


25 
25 


1.00 
.50 


.30 
.20 


1.20 1 
.40 / 


100X3.53 


3.53 


6.63 


6.63 




f 4, 


25 


1.00 


.30 


1.20 ^ 










100 


2 


25 


.50 


.20 


.40 


100X3.53 


3.53 


11.13 


11.13 




I 10 


25 


2.50 


.20 


2.00 










B 1-6 mp 


50 


{' 


25 


.50 


.25 
5 each 


.50 1 
2.50 / 


50X6.63 


3.32 


6.82 


13.64 




1850 


51.7 




14.94 


14.10 


54.73 


83.77 





Less 600 Bf duplicated 
200 B 
50 M 



850 



1000 



14.94 



X3.365 
X3.534 
X6.63 



14.10 



20.19 
7.07 
3.31 



30.57 



24.16 



30.57 



53.20 

Total of 

order 



From this sheet the following figures are entered in the 
Balance of Stores Book or Perpetual Inventory: 









Per 100 


Amount 


Mar. 20/16 


Bf 


1-6 


400 


XI3.365 


$13.46 




B 


1-6 


300 


3.534 


10 60 




B 


1-6 












sp 12-2 


100 


7.87 


7 87 




B 


1-6 m 


50 


6.63 


3 32 




B 


1-6 ma 


100 


11.13 


11.13 




B 


1-6 mp 


50 


13 64 


6.82 




tooo 


53.20 



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COST-FINDING METHODS. USE OF THE JOB TICKET 



63 



The Inventory should already have been credited, from the 
first Job Ticket of this order, with the material issued, 1725 
pounds at 1.4 cents, $24.15. 

The method of charging the inventory only with the net 
product of the order, that is, 400 Bf, 300 B, etc., should be 
used when the several operations follow one after the other, 
the material upon which a second or other subsequent opera- 
tion is to be performed not being sent to the stores for tem- 
porary storage, but kept in the shop. If, however, the whole 
of the 1000 forgings are sent to the stores, then the Inventory 
should be chained with them, and credited later when por- 
tions of the lot are withdrawn for later operations. 



Comparison of Burden Rates. In the above table of 
Piece Costs the burden has been assumed to have been 
fixed on the standard machine-rate basis, the hourly rate 
for each machine having been computed from the sta- 
tistics of the previous year. Omitting the plated bolts, 
B l-6mp, for which the cost price is fixed in the plat- 
ing room, the man-hours foot up to 49.7, the wages to 
$14.44 and the burden to $11.10. The average burden 
is 22.3 cents per man-hour, or 76.9 per cent on the 
wages. Applying these figures to the hours and wages 
for each of the several operations we obtain the follow- 
ing: 







Machinb-bour Burden 


Man-hour 
Burden 


Burden 
ON Wages 


Excess Over 
Machine Burden 




Hours 


Wages 


Rate 


% of Wage 


Amt. 


Hours 
X22.3 


76.9% of 
Wages 


Man-hour 
Burden 


Per cent 
on Wages 


Bf 
B 
Bsp. 

B 91 
B ma 


17.5 
1.2 
9 

6 

16 


6.00 

.24 

2.70 

1.50 
4.00 


.20 
.50 
.20 

/ 4 at .30 \ 
\ 2 at .20 / 
/ 4 at .30 \ 
I 12 at .20 / 


58 

250 

67 

107 
111 


3.50 

.60 

1.60 

1.60 
3.60 


3.90 

.27 

2.01 

1.34. 
3.57 


4.61 

.18 

2.08 

1.15 
3.08 


+ .40 
-.33 
+ .21 

-.26 
-.03 


+ 1.11 

- .42 
+ .28 

- .45 

- .52 




49.7 


14.44 


Av 


76.9 


11.10 


11.09 


11.11 





If we assume that the machine-rate burden is correct then 
the uniform man-hour rate may make the burden from 
40+350, 11.4 per cent too high, to 33+60, 55 per cent too 
low, and the uniform percentage on direct labor may make 
the burden from 111 +350, 31.7 per cent too high, to 42 +60, 
70 per cent too low. 

Other systems of applying burden, such as that of adding 
the arbitrary figure of 100 per cent to the direct-labor cost, 
will give still greater .variations from the burden computed 
on the standard machine-hour rate basis, and systems in 
which it is attempted to distribute all the shop charges for a 
month over the cost of product for a month, by supplementary 
rates or otherwise, will often lead to absurd and useless 
figures of burden, such as 1000 per cent or more of direct- 
labor costs. 

A Complete Job Ticket should give the following informa- 
tion: 

OflSce Order No. 

Date issued. 

Date work began. 

Date work ended. 

Name and Clock No. of Workman. 

Kind of Work. 

Room or Department. 

Machine. 

Class of Product. 

Piece Symbol. 

Wage or Piece Rate. 

Quantity of Material delivered for the job. 

Quantity of Material and scrap returned. 



No. of pieces made. 

No. of pieces spoiled. 

Receipt by storekeeper of the worked material or sjTnbol 
showing where it has been moved to for the next operation. 

Job finished or not. 

When the Ticket is returned to the office the clerk enters 
on it: 

Hours worked. 

Labor cost — Hrs.Xrate-h bonus if any. Amount (or Pieces 
Xrate), Workman's earnings per hour. 

Material, weight, price, amount, less value of scrap returned. 

Burden, rate and amount. 

Total cost for material, labor and burden. 

Cost per piece (or per 100 pieces) burden and total per 
piece. 

Standard cost. 

Reason for excess above standard. 

As the job tickets come into the office during the week, as 
the jobs are finished, and at the end of the week whether the 
jobs are finished or not, the costs are computed, and the 
tickets are put into pigeonholes corresponding to the sub- 
divisions of the pay roll (departments or rooms) and arranged 
in order according to the clock numbers of the workman. 
The pay rolls are then made out. 

The footing of each subdivision may be entered in a statis- 
tical sheet, which shows the total labor cost for the week m 
each department, the number of men working in it, and the 
total hours of labor performed during the week, the average 
number of hours per week per man, and the ratio of this 
average to the total working hours in the week. 



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64 BOOKKEEPING AND COST ACCOUNTING 

The tickets may then be sorted in order to obtain such By Machine Numbers, to obtain Machine hours of each 

information as may be desired for statistical, cost, or account- machine (or class or group of machines), 

ing purposes. By Class letter, to obtain hours and amount for each 

In large factories, the information on the tickets may class of product, 

be punched on Hollerith cards (see page 135), and these By Office Order Number, to obtain total cost for the week 

may be sorted as to obtain easily any kind of statistics of work done on each order, 

desired. By Piece Number, to obtain total labor, material and bur- 

The sortings may be as follows: den and the total cost of each piece. 

By Room Numbers, to obtain total man-hours and total The tickets are finally to be filed by piece numbers and 

wages in each room (or group of rooms). kept for five years or more for statistical purposes. 



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CHAPTER VIII 



DISTRIBUTION OF BURDEN 



The great problem in cost accounting is How shall the 
burden be distributed or " allocated " to the cost of the 
various articles produced? In the case of a factory producing 
only one kind of material the answer is easy: The whole cost 
of running the factory for a year, including material, labor 
and burden, divided by the number of tons or yards pro- 
duced during the year, is the cost per ton or per yard, pro- 
vided the factory runs the normal number of days in the 
year and provided that the cost of extraordinary repairs, 
Ihe benefit of which extends over a number of years, is not 
all charged in the burden for one year but is pro-rated over 
the stated nmnber of years. 

When the factory is shut down for a considerable period 
of time, as during a strike, the loss due to the continuance of 
fixed charges while no product is made should not be charged 
as burden so as to increase the cost of the goods produced 
while the factory is running, but should be charged to Profit 
and Loss Account. 

When two or more kinds or varieties of articles are pro- 
duced then the difficulty of distributing the burden begins, 
and when the products are made in great variety the prob- 
lem becomes so complex that the highest skill of the man- 
agement and the accountant combined are required to effect 
even an approximate solution. 

To obtain a clear idea of the difficulty of the problem let 
us consider a hypothetical case of a concern with $100,000 
invested capital and total expenditures of $200,000 per year 
including the reserves set aside to cover depreciation. The 
first uncertainty the accountant meets is the amount to be 
allowed for depreciation. This is entirely an estimate, 
based upon judgment and experience, and it is included in the 
following table: 

Yearly Ezpendltares 





Burden 




p I 


Interest 5% on $100,000 


$ 5.000 


F2 


Taxes, Insur»Doe A Depreciation, 10% 


10.000 


F3 


Salaries 


15,000 


F4 


Indirect Labor 


15,000 


V I 


Interest on Borrowed Money 





V2 


Depredation, Maintenance 


5.000 


V3 


Indirect Labor 


20,000 


V4 


Fuel and other supplies, shrinkage, etc. 

Total Burden 


10.000 




80.000 




Total Direct T^bor 


100.000 




Total Material 

Total Factory Coet of Product 


20.000 




200.000 



F, fixed charges, independent of value of product; V, charges which vary 
with the volume of product. F2 covets obsolescence of plant and equip- 
ment, and reserve for certain unusual risks such as changes in fashion of 
product: V2 covers depreciation due to wear and tear of machinery, and 
reserve for repairs and renewals. 



Burden Distributed as a Percentage on Direct or 
Productive Labor. The total annual burden being 80 per 
cent of the total direct labor cost, the easiest way to appor- 
tion the burden to cost of product is to add to the cost of 
material and direct labor charged against every item of 
product, 80 per cent of the direct labor charge on that item. 
This may be a good enough method for the needs of some fac- 
tories, in which the whole product is fairly uniform in kind 
and size, the machines used are nearly of the same cost, and 
the wage rate also approximately uniform, but when these 
differ to any great extent the method is highly inaccurate 
and may lead to absurd and dangerous conclusions in regard 
to the costs of some of the products. 

The usual method of adding a certain percentage upon every 
article manufactured to cover all indirect cost is wrong in principle. 
The indirect cost is not the same for each class of articles. — J. L. 
Nicholson, Factory Organization and Costs, p. 32. 

Man-hour Method of Distribution. If the S100,000 
cost of direct labor in the above table represents 400,000 
man-hours (say an average of 160 men working 2500 hours 
per year) at an average hourly wage of 25 cents, then the 
average burden, 80 per cent of the direct labor, is 20 cents 
per man-hour, which is to be added as burden to the cost for 
material and for direct labor of every article produced. 
When the wage rates and the size of machines throughout 
the factory are variable this method of apportioning burden 
is much more accurate than the percentage-on-labor method. 

Example. An apprentice at SI per day is doing rough 
work on a large machine. Numerous small jobs are being 
worked on, requiring much supervision by the foreman and 
much clerical work to keep track of the orders. At the same 
time a $4 man is doing fine work on a small tool, the job 
lasting all day, the amount of supervision and of clerical 
work being almost nothing. By the percentage on direct 
labor method the cost for labor and burden (80 per cent on 
direct labor) is 



for the apprentice SI +0.80 »$1.80 
for the skilled workman 4-1-3.20 » 7.20 



S9.00 



By the man-hour method, with a burden of 20 cents per 
man-hour and a 10-hour day, the labor+burden cost is 



S1+(0.20X10)«S3.00 
4+ (0.20X10)= 6.00 



$9.00 



The man-hour burden on the apprentice is 200 per cent of 
the direct labor cost, and that on the $4 man is only 50 per 
cent of the direct labor cost. 



65 



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66 



BOOKKEEPING AND COST ACCOUNTING 



The man-hour method in this case gives a closer approxi- 
mation to the true cost than the percentage-on-labor method, 
but it fails to take account of the fact that the apprentice's 
work should be charged with a higher burden than the high- 
priced man's, because he is using a larger and more costly 
tool and requires more of the foreman's time for his super- 
vision. 

A more correct distribution of the burden would be, prob- 
ably, to charge 25 cents per hour burden on the apprentice's 
work and only 15 cents an hour on that of the $4 man. The 
labor and burden cost would then be 



$I4-(0.25X10) = 
4+(0.15XlO): 



$3.50 
: 5.50 



$9.00 



When the man-hour method of apportioning burden is 
used, the charge should not be a uniform figure for all the 
men, but a burden table should be prepared showing a dif- 
ferent burden rate for different classes of men, of machines, 
and of kinds of work. 

An objection commonly made to the use of the man-hour 
instead of the percentage-on-direct-labor method is that it 
involves extra work on the part of the cost clerks. The 
cost of direct labor has to be figured in making out the pay 
roll, for which the summing up of the man-hours is un- 
necessary. 

Variable Factors in Manufacturing that Affect the 
Burden Charge 



Classes of product 
Size 

Quantity in lot 

Pieces in unit or 
item of product 

Operations on a 
piece 

Character of work 
Wage system 



Department or 
Room 



ABC D 

Large Medium Small Special or mixed 

(from 1 to 10,000). 
(from 1 to 20). 



Work standard or 
non-standard 



(from 1 to 10). 

Coarse, medium, fine. 

Day work, piece work, task wbrk and 
bonus 

' L M N P. . (One or more machines; 
variable as to size, cost, frequency and 
cost of repairs; number of machines 
handled by one man; amount of 
supervision required.) 

Standard (fairly large order, men and 
machines suitable). Non-standard 
(small order, rush order, machine in 
poor condition, underspeeded, large 
machine on small work, man un- 
skilled, high-priced man on low-grade 
work). 



Business Condi- 
tions 



Normal — few Machines idle. 

Depressed — ^many Machines idle. 

Boom — men working overtime, rush 
orders interfering with regular orders, 
delays in receiving material. 



Burden or Overhead Factory Expense. 
F, Fixed Charges — Independent of Volume of Business. 

1. Interest on Investment in Buildings, Equipment, 

and Normal Stock in Trade. 

2. Taxes, Insurance, Depreciation due to Obsoles- 

cence. 

3. Salaries of OflScers, Superintendents and Head 

Foremen. 

4. Indirect Labor — Engineer, Firemen, Watchmen, 

Head Clerks, Head Draftsman, Storekeeper. 
V, Variable Charges — Dependent more or less on Volume of 
Business. 

1. Interest on Increased Stock in Trade; on Borrowed 

Money. 

2. Depreciation, Repairs and Maintenance, due to wear 

and tear. 

3. Indirect Labor and tool-makers, draftsmen, clerks, 

cleaners, sub-foremen; all wages charged to expense 
accounts. 

4. Supplies— Fiiel, Power, Light, Oil, Small Tools, Sta- 

tionery, Postage. 
6. Shrinkage on Raw Material. 

The cost of production of an article made in a factory at a 
given time is a figure that can be determined, not accurately 
but only approximately. 

The portion of the total cost of production which is paid 
for the raw material, and the portion which is paid for the 
labor directly engaged in the production of the article (called 
direct labor) may be definitely known, but the portion called 
expense, overhead or burden (which is often more than the 
sum of the costs of material and of direct labor) can only be 
approximated. 

The amount of burden charged on the books as part of the 
cost of an article will depend on the accounting system that 
is used and on the ideas of the accountant or of the manage- 
ment as to the method of computing the burden. 

The Department Method of Distributing Burden. 
One of the methods of avoiding the objection to both the 
percentage-on-labor burden and the man-hour burden, that 
they take no account of the different conditions under which 
different men work, such as size and cost of machines, space 
occupied, power consumed, and cost of supervision, is to 
divide the factory into departments, such as foundry", smith 
shop, machine shop, assembly room, finishing and packing 
room, etc., and to compute the total annual burden of each 
department and distribute it to the labor cost by depart- 
ments, either as a percentage on labor cost or as a charge per 
man-hour. 

For example, we may repeat the figures of the annual 
burden given above (page 65) and divide them among four 
departments L, M, N, P, as in the following table: 



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DISTRIBUTION OF BURDEN 



67 





DlBTRIBUTION BT 


Dbpartubnts 








Burden 


Total 


L 


M 


N 


P 


F I 


Icterert 


5,000 


1.000 


1,000 


2,000 


1.000 


F 2 


Taxes, etc. 


10.000 


1.000 


1.000 


6,000 


2.000 


F 3 


Salaries 


15.000 


2,000 


3.000 


9,000 


1.000 


F4 


Indirect Labor 


15.000 


3,000 


1.000 


5,000 


6.000 


V 2 


Maintenance 


5.000 


1,000 


1.000 


2.000 


1.000 


V3 


Indirect Labor 


20.000 


4,000 


3,000 


10.000 


3.000 


V4 


Supplies, etc. 
Burden 


10.000 


3,000 


2.000 


2.000 


3,000 




80.000 


15.000 


12.000 


36,000 


17.000 




Material 


20.000 


9,000 


3.000 


5,000 


3.000 




Direct Labor 
ToUl Cost of Product 


100.000 


26.000 


5.000 


59,000 


10.000 




200,000 


50.000 


20,000 


100.000 


30.000 




Burden. % of EHrect 














Labor 


80 


57.7 


240 


61.0 


170 




Man-bours 


400.000 


104.000 


20,000 


236.000 


40.000 




Burden, cents per 














man-hour 


20 


14.4 


60 


15.3 


42.5 



Burden Distributed by Classes of Products. Instead 
of dividing the factory into departments and computing the 
burden belonging to each, the total of the products may be 
divided into classes, as A, B, C, D, or say Engines, Boilers 
Pumps, Miscellaneous; or Heavy, ^ledium, Light, and Special 
Products. Investigations are made to find from the records 
of the preceding year what portion of the total burden should 
be apportioned to the several classes, and the percentage-on- 
labor or the man-hour burden rate for the current year or 
other period is fixed for each class accordingly. Taking the 
example already given and distributing the burden among 
four classes of products we may obtain a table like the fol- 
lowing: 





DiaTRiBunoN by Classes of 


Product 






Burden 


Total 


A 


B 


C 


D 


F 1 


Interest 


5.000 


2.000 


1,000 


1.000 


1.000 


F2 


Taxes, etc. 


10,000 


4.000 


3.000 


2.000 


1.000 


F3 


Salaries 


15,000 


2.000 


3.000 


4.000 


6.000 


F4 


Indirect Labor 


15,000 


3.000 


6,000 


3.000 


3.000 


V 2 


Maintenance 


5,000 


1.000 


1,000 


2.000 


1.000 


V3 


Indirect Labor 


20.000 


6.000 


3.000 


3.000 


8.000 


V4 


Supplies, etc. 
Total Burden 


10,000 


2,000 


2.000 


3.000 


3.000 




80.000 


20,000 


19.000 


18.000 


23.000 




Material 


20,000 


10,000 


5.000 


4.000 


1.000 




Direct Labor 
Total Cost of Product 


100,000 


20.000 


26.000 


28.000 


26.000 




200,000 


50,000 


50.000 


50.000 


50,000 




Burden, % of Direct 














Ubor 


80 


100 


73.1 


64.3 


88.5 




Man-hours 


400.000 


80.000 


104,000 


112.000 


104.000 




Burden, cents per 














man-hour 


20 


25.0 


18.3 


16.1 


22.1 



Comparison of Burden Costs by Different Methods. 

Suppose a piece or a lot of pieces of Class A is made in Depart- 
ments L, N, P, with the following costs for direct labor. 

Dept. L, 10 hrs. at 20c. S2.00 
N, 20 his. at 15c. 3.00 
P, lOhrs. at 30c. 3.00 

40 man-hours S8.00 



Consider the burden to be computed in different ways: 
(1) 80 per cent on direct labor, S6.40; (2) 20 cents per man- 
hour, $8.00. 



Departments 


L 


N 


P 


ToUl 


(1) 80% on direct labor 

(2) 20 cents per man-hour 


1.60 
2.00 


2.40 
4.00 


2.40 
2.00 


6.40 
8.00 



(3) Different burden in the three departments. 



Per cent on direct labor 




Cents per man-hour 




On direct labor cost: 




L, 2.00X60% 


1.20 


N, 3.00X80 


2.40 


P. 3.00X120 


3.60 



h 


M 


60 


80 


15 


20 



N 
120 
30 
On man-hour basis 



10X15 
20X20 
10X30 



Total 



7.20 



1.50 
4.00 
3.00 

8.50 



(4) Suppose there are four lots, one each in Classes A, B, 
C, D, with the burdens given these four classes as above. 



Burden % of direct labor 
Cost of laborlS.OO, Burden 
Burden, cents per man- 
hour 
40 man-hours. Burden 



Avge. 


A 


B 


C 


80 


100 


73.1 


64.3 


6.40 


8.00 


5.85 


5.14 


20 


25 


18.3 


16.1 


8.00 


10.00 


7.32 


6.44 



88.5 
7.08 



22.1 
8.84 



By the several different ways of figuring burden it may 
range in this case from $5.14 to $10.00, and if the cost of 
material is $2.00 and labor $8.00, the apparent factory cost 
ranges from $15.14 to $20.00, a difference of $4.86, which is 
32 per cent of the smaller figure. 

The danger of estimating burden as a uniform percentage 
on the direct labor cost or as a uniform addition per man- 
hour, in a factory that makes a variety of products, is shown 
by these figures. 

Distribution of the Machine Shop Burden — ^The 
Machine-hour Rate. In the case considered we have taken 
the total factory burden at $80,000. It may be subdivided 
among the producing departments say as below: 





Burden 


Direct Labor 


L Carpenter and Pattern Shop 

M Blacksmith Shop 

N Foundry 

P Machine Shop 

Q Grinding and Plating Room 


2.600 
2.000 
8.900 
59,000 
7.500 


2.400 
11.100 

5.400 
75.100 

6.000 




80.000 


100.000 



As by far the largest part of the burden is that of the machine 
shop it is most important that this part of the burden be 
apportioned to the product of the shop with as near an ap- 
proximation to accuracy as possible. 

By the machine-hour-rate of distributing burden each 
machine, work bench, or other " productive center " is 
assigned a certain hourly rate to be charged during a whole 



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68 



BOOKKEEPING AND COST ACCOUNTING 



year, the amount of which depends on the estimated cost of 
keeping it in the factory and supplying it with power, heat, 
light and supervision. This cost includes interest on its first 
cost or on its appraised value, a charge for the estimated 



annual repairs, probable depreciation due to wear and tear and 
obsolescence, and charges for space occupied, for power, for 
superintendence and for indirect labor, such as that of tool- 
makers, crane men^ storekeeper, clerks, etc. 



CALCULATION OF THE MACHINE SHOP BURDEN 



Machines 


Value 


Int.. Ins.. Tax, 


Working 


Horse- 


H.P. 


Sq. ft. 


Cost of 


Bum 


Sum -!- 


Hourly 






Depn. etc. 


Hours 


power 


Cost per 


of 


Space t 


of 


hours 


Burden 






(a) 


per year 


each 


year (6) 


Space* 


(c) 


(a) (6) (c) 


per year 


Rate 


1 BoTins MiU 


$5,000 


10% 


= $500 


1,000 


10 


$200 


384 


$192 


$892 


$0.89 


$1.10 


1 Boring MiU 


2.000 


12 


240 


2.000 




200 


180 


90 


530 


.27 


0.48 


1 Planer 


1,500 


10 


150 


1.000 


10 


200 


200 


100 


450 


.45 


.66 


1 Planer 


1.000 


15 


150 


1,500 




150 


155 


78 


378 


.25 


.46 


2 Planers each 


500 


15 


75 


2,000 




120 


110 


55 


250 


.13 


.34 


1 Shaper 


1.000 


12 


120 


2.000 




200 


144 


72 


392 


.20 


.41 


2 Shapen each 


500 


12 


60 


2.500 




100 


110 


55 


215 


.09 


.30 


1 MiUer 


1,500 


10 


150 


1.500 


10 


300 


no 


55 


505 


.34 


.65 


1 Miller 


800 


12 


96 


2,000 




200 


92 


46 


342 


.17 


.38 


1 MiUer 


600 


15 


90 


2,500 




150 


74 


37 


277 


.11 


.32 


5 Millers sseh 


400 


12 


48 


2,500 




100 


56^ 


28 


176 


.07 


.28 


1 Lathe 


2,000 


10 


200 


1,000 


12 


240 


272 


136 


576 


.58 


.79 


1 TAthe 


1.500 


12 


180 


2.000 


10 


400 


193 


% 


676 


.34 


.55 


1 TAthe 


1.000 


15 


150 


2.500 




250 


144 


72 


472 


.19 


.40 


1 Lathe 


800 


15 


120 


2,500 




150 


124 


62 


332 


.13 


34 


8 Lathes each 


500 


15 


75 


2.500 




100 


% 


48 


223 


.09 


.30 


2 Lathes each 


200 


15 


30 


2.000 




40 


82 


41 


111 


.06 


.27 


1 Turret Lathe 


2,000 


10 


200 


2.000 




200 


112 


56 


456 


.23 


.44 


1 Turret Lathe 


1.000 


12 


120 


2,500 




150 


82 


41 


311 


.12 


.33 


4 Turret Lathes each 


800 


12 


96 


2.500 




100 


68 


34 


230 


.09 


.30 


1 Screw Maoh. 


1,500 


15 


225 


2,000 




200 


% 


48 


473 


.24 


.45 


1 Screw Mach. 


1.000 


15 


150 


2.000 




80 


82 


41 


271 


.14 


.35 


1 Drill 


1.200 


10 


120 


1,500 




150 


47 


24 


294 


.20 


.41 


1 Drill 


800 


10 


80 


1,500 




60 


40 


20 


160 


.11 


.32 


2 Drills each 


400 


12 


48 


2,000 




40 


26 


13 


101 


.05 


.26 


5 Drills each 


100 


12 


12 


2,500 




50 


20 


10 


72 


.03 


.24 


IPress 


1.500 


10 


150 


1.000 




60 


124 


62 


272 


.27 


.48 


1 Press 


1.000 


10 


100 


1,500 




60 


92 


46 


206 


.14 


.35 


5 Presses each 


500 


12 


60 


2.000 




40 


45 


22 


122 


.06 


.27 


1 Keyseater 


300 


10 


30 


100 






48 


24 


54 


.54 


.75 


1 Screw Press 


200 


10 


20 


100 






48 


24 


44 


.44 


.65 


1 Cutting-off Maeh. 


200 


10 


20 


1.000 




40 


80 


40 


100 


.10 


.31 


1 Centering Mach. 


200 


10 


20 


1.000 




20 


80 


40 


80 


.08 


.29 


30 small Mach's Av. 


100 


10 


10 


2,500 


0.5 


25 


40 


20 


55 


.02 


.23 


30 Benches and Fittings 


30 


10 


3 


2.000 






40 


20 


23 


.01 


.22 


Sum for one of each kind 


33,630 


3898 


62.700 


123 


4375 


3696 


1848 


10,121 




Add for dupUcates 


14.970 




1883 


132.300 


60 


2785 


4004 


2002 


6.670 








8.600 


5781 


195,000 


183 


7160 


7700 


3850 


16,791 





** Floor space occupied by machine, including 
t Cost of space, including rent, heat, light and 



Figuring these several charges by the year the total for 
each machine is divided by the number of hours which the 
machine may be expected to run in a normal business year, 
which may be judged from statistics of previous years. 

A list of the machines with their several charges is made out 
like the one shown in the above table. 

The sum of the three annual costs (a), (6), (c), and the 
corresponding hourly rate for some of the machines, may 
appear extravagantly high, such as the hourly rate for the 
large boring mill, 89 cents; the large lathe, 58 cents; the small 
keyseater, 54 cents; and the screw press, 44 cents; but these 
high figures are due to the small number of hours that the 
machines are supposed to be used in a year. In making 
estimates of costs -for the purpose of bidding on contracts 
these high figures may, in itib discretion of the management, 



ways and space for operator and for material, 
estimated at 50 cents per square foot per year. 

be reduced arbitrarily, so that the actual working hours of 
the machines may possibly be increased and the cost of 
idleness thus be decreased. 

After obtaining the sum of the charges (a), (6), (c), to be 
made against each machine, and the hourly rate, due to these 
charges, the next thing to be considered is what additional 
hourly charge shall be made to them in order to distribute 
properly the annual cost for salaries and for so much of the 
indirect labor as has not already been included in the costs 
(6) and (c) for power, heat, light, and cleaning. 

Subtracting $16,791, which the table shows to be the sum 
of the charges against the several machines for interest, 
depreciation, etc., and for power furnished and space occu- 
pied, from the total machine shop burden of $59,000, we have 
$42,209 which remains to be distributed over the product in 



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DISTRIBUTION OF BURDEN 



69 



some way. We may apportion it as a percentage on the 
direct labor, by dividing it by $75,100, the total cost of 
machine shop direct labor; $42,209-1-75,100=56.3 per cent, 
which is to be added to the direct labor cost of every job in 
addition to the hourly machine charge in the table (sum of 
(<»), (^)> (c)> charges divided by estimated hours that the 
machine runs in a year), but that method is the most inac- 
curate of all methods for a shop in which the value of the 
tools and the rates of wages are not fairly uniform. A much 
better method is to divide it by the total number of estimated 
man-hours, obtaining say 80 men, 2500 hours per year, 
$42,209 4-200,000=21 cents per hour, which is to be added 
to the rate already found for each machine, giving the figures 
in the last column of the table as the total machine rate 
burden for each machine. 

Production orders which benefit by certain machines should be 
charged a rental rate for the use of the machine, based on the 
length of time the machine is employed. The rate of charge for 
each individual machine is based on the costs of installing, main- 
taining and operating it. It should not be the aim purposely 
to allow the machine to make a so-called profit, but merely to 
furnish the service of the machine at actual cost, and that cost 
should include interest on the investment in the machine and 
motor (if motor-driven), rental for the space it occupies, a reserve 
for repairs, a reserve for depreciation and obsolescence, a charge 
for power and for the service of the man or men who operate it, 
together with a burden for crane service and diffused costs. — 
F. E. Webner, Industrial Engineering, April, 1909. 

Modifications of the Machine Rate Burden. Suppose 
that the total residual biu-den after deducting the (a), (6), 
(c) charges, $42,209, is subdivided as follows: 

(1) Superintendent, Asst. Supt., Purchas- 
ing Agent, Bookkeepers, Order 
Clerks, Stenographers, Office 

Supplies $18,000 

Planning Room, Time and Cost 
Clerks, Storekeepers, Foremen, 
Gang Bosses, Errand Boys 10,000 

(3) Tool-makers, Toolnsetters, Repair 
men. Draftsman, Transportation, 
Watchmen, Cleaners, Yard Men . . . 14,209 



(2) 



$42,209 



An of this siun, which amounts to 56 per cent of the direct 
labor or 21 cents per man-hour, has to be charged to the cost 
of product. It is evident that neither the percentage-on- 
direct-labor method, nor the man-hour method of appor- 
tionment takes account of the fact that some operations 
require a great deal more of the time of the overseers, clerks 
and other indirect labor than do other operations that require 
the same number of man-hours and the same expenditure 
for direct labor, and that the proper amount chargeable from 
each of the three subdivisions, (a), (6), (c), of the above 
table to different jobs is by no means proportional to the 
totals of each of tne subdivisions. 

For example, a man may be engaged a whole week on turn- 
ing flywheel rims or doing other steady work on the large 
boring mill, requiring practically none of the time of the 



superintendent, foreman, storekeeper, planning room or tool- 
setters, and the same may be true of some of the work done 
on the large planer and the large milling machine, while a 
man may do twenty different jobs in a week on one of the 
small lathes or other machines, requiring a great deal of 
indirect labor of all kinds for his assistance. Instead of 21 
cents per man-hour being the proper charge to be added to 
the (a), (6), (c), burden for each machine or bench, it may be 
fairer to add only 5 cents for the large boring machine and 
30 cents for the small machines. One good way of adjusting 
the burden rates so as to obtain a reasonable approach to 
accuracy is to have the annual burden schedule revised by a 
conference of the superintendent, foremen and heads of the 
planning and cost departments, modifying the uniform indi- 
rect labor burden rate of 21 cents per man-hour, lowering 
the rates on some machines and raising it on others, in such a 
way as to leave the total annual amount (in this case $42,209) 
the same. 

The Job Burden Rate. Another method which is prob- 
ably even better than the one above described, is to examine 
the table of the subdiATsions (1), (2), (3), of the total indirect 
burden $42,209, and the detailed table of salaries and other 
costs from which this total and its subdivisions are made up, 
and consider which of the costs should be applied to the 
product in proTX)rtion to the man-hours of direct labor, and 
which to the number of jobs done in a week or other given 
time. For example, it may be found that the total of sub- 
division (2) ($10,000), is related almost entirely to the 
mmiber of jobs, a small job lasting an hour requiring as large 
a share of this $10,000 as a large job lasting a' whole week. 
From statistics of preceding years it may be found how many 
separate job tickets may be expected to be issued in a normal 
business year, say in the case considered, 50,000, and this 
divided into what may be considered the part of the annual 
biuxien that is proportional to the number of jobs, or $10,000, 
gives 20 cents per job, which may be printed once for all on 
the blank job-cost tickets to save the trouble of writing it. 
When this is done the addition to the machine-hour rate is 
decreased accordingly from 21 cents an hour, or whatever 
figure may have been fixed as the proper burden for the sev- 
eral machines, to (42,209 -10,000) -5-200,000 = 16 cents or 
by 10,000 -5-200,000 =5 cents per man-hour. • 

For example, suppose that two men are each using the same 
kind of machine, which has a regular burden rate of 32 cents 
an hour, but one man works 50 hours on one job while the 
other works 50 hours on 20 different jobs, or 2} hours on each, 
the first man's ticket, on the regular burden rate, would read 



Direct Labor 50 hrs.X 30c. =$15.00 
Burden 50hrs.X32c.= 16.00 



$31.00 



The second would have for each job: 

Direct Labor 2}x30 $0.75 

2ix32 



Burden 



80 



$1.55 
Twenty jobs, twenty tickets, $31 . 00 



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By the modified method, using a job charge of 20 cents per 
job, the first ticket would be 

Direct Labor 50X30 =$15.00 
Mach. burden 50X27= 13.50 
Job burden .20 



50X30=115.00 
Mach. burden 50X27= 13.50 
Twenty jobs at 20c 4.00 17.50 



S32.50 



S28.70 
The sum of the twenty tickets of the second man would be 



Showing a difference of $3.80, which seems only fair when 
we consider that the 20 jobs require a great deal more of 
indirect labor than the single long job. 



Burden Table 

Cents per Hour 





15 


20 


25 


30 


35 


40 


45 


50 


60 


70 


80 


90 


Hours 




























Burden Charge 




.15 


.20 


.25 


.30 


.35 


.40 


.45 


.50 


.60 


.70 


.80 


.90 




.30 


.40 


.50 


.60 


.70 


.80 


.90 


1.00 


1.20 


1.40 


1.60 


1.80 




.45* 


.60 


.75 


.90 


1.05 


1.20 


1.35 


1.50 


1.80 


2.10 


2.40 


2.70 




.60 


.80 


1.00 


1.20 


1.40 


1.60 


1.80 


2.00 


2.40 


2.80 


3.20 


3.60 




.75 


1.00 


1.25 


1.50 


1.75 


2.00 


2.25 


2.50 


3.00 


3.50 


4.00 


4.50 




.90 


1.20 


1.50 


1.80 


2.10 


2.40 


2.70 


3.00 


3.60 


4.20 


4.80 


5.40 




1.05 


1.40 


1.75 


2.10 


2.45 


2.80 


3.15 


3.50 


4.20 


4.90 


5.60 


6.30 




1.20 


1.60 


2.00 


2.40 


2.80 


3.20 


3.60 


4.00 


4.80 


5.60 


6.40 


7.20 




1.35 


1.80 


2.25 


2.70 


3.15 


3.60 


4.05 


4.50 


5.40 


6.30 


7.20 


8.10 


10 


1.50 


2.00 


2.50 


3.00 


3.50 


4.00 


4.50 


5.00* 


6.00 


7.00 


8.00 


9.00 


20 


3.00 


4.00 


5.00 


6.00 


7.00 


8.00 


9.00 


10.00 


12.00 


14.00 


16.00 


18.00 


30 


4.50 


6.00 


7.50 


9.00 


10.50 


12.00 


13.50 


15.00 


18.00 


21.00 


24.00 


27.00 


40 


6.00 


8.00 


10.00 


12.00 


14.00 


16.00 


18.00 


20.00 


24.00 


28.00 


32.00 


36.00 


50 


7.50 


10.00 


12.50 


15.00 


17.50 


20.00 


22.50 


25.00 


30.00 


35.00 


40.00 


45.00 


60 


9.00 


12.00 


15.00 


18.00 


21.00 


24.00 


27.00 


30.00 


36.00 


42.00 


48.00 


54.00 


70 


10.50 


14.00 


17.50 


21.00 


24.50 


28.00 


31.50 


35.00 


42.00 


49.00 


56.00 


63.00 


80 


12.00 


16.00 


20.00 


24.00 


28.00 


32.00 


36.00 


40.00 


48.00 


56.00 


64.00 


72.00 


90 


13.50 


18.00 


22.50 


27.00 


31.50 


36.00 


40.50 


45.00 


54 00 


63.00 


72.00 


81.00 



For the purpose of facilitating computations of burden it is 
customary in some shops to express all machine-hour rates in 
even multiples of 5 cents; thus, a 22 cent rate would be 
changed to 20 cents and a 23-cent rate to 25 cents. The error 
in making these changes is negligible, for it is far less than 
probable error in the estimates for depreciation, hours run 
per j'ear, horsepower, rental value of space occupied, and 
indirect labor, upon which the machine rate is based. A mul- 
tiplication table such as is shown above may be used to facil- 
itate computations. 

Distribution of Burden in Minor Departments 
Blacksmith Shop (10 men). 

Equipment: 

I Furnace $400 

I Hammer 1000 

I Hammer 500 

4 Anvils A Tools 400 

Forges A Fittings 700 

3000 



Interest, Depreciation lb. 12% 

Fuel 

Steam for Hammers 

Iron A Miscellaneous Supplies 



Share of Superintendent, storekeeper, clerical work, etc. 



$300 

500 

40 

600 

1500 
500 



Av. Time 50 wks. XS222 
Indirect labor in the shop, none 

Expense burden for superintendence, etc. 



$2000 
$11,100 

2,000 

$13,100 



The work done in the Blacksmith Shop may all be done on 
job tickets, either for salable goods, for expense supplies for 
the shop, or for repairs. There is no indirect labor charge, 
every man in the shop being a workman. The burden charge, 
$2000 per year, may be conveniently charged to the jobs at 
8 cents per man-hour, 10 men, 2500 hours =25.00 man-hours, 
divided into $2000 =8 cents. 

Carpenter, Pattern, and Paint Shop (5 men). 



Direct Labor: 

4 Blacksmiths 
4 Helpers 
I Hammerman 
I Hammerman 

10 



Each per week 

$24 

15 

36 

30 



$96 
60 
36 
30 

$222 



Equipment: 

1 Planer 
I Jig Saw 

1 JiK Saw 

2 Drills 
Sundry Tools 



$400 
200 

too 

200 
600 

$1500 



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I Carpenter 
I Patternmaker 
3 Helpers 
15 each 



Lumber A other Supplies 



Interest, Depreciation, etc., 15% 
Power» Light, Heat 
Miscellaneous Burden 



Direct Labor 

Labor Charged to General Factory Burden 

Burden of the Shop 



Per week 
$21 
24 



45 

— Per year 

90X50- $4500 
500 
$5000 

$225 
100 
175 



If the estimate by separate classss is correct, then the 
indirect labor cost figured as a uniform percentage of direct 
labor may be from (16.00-10.11) -^16 -37 per cent too low to 
(11.55 -8) -s-8 ^44 per cent too high, and the cost figured as a 
uniform charge per hour of direct-labor may be from (16.00 — 
11.70)4-16=27 per cent too low to (11.70 -8) -h8 =46 per 
cent too high. 

If we figure the indirect labor cost on the basis of the ton- 
nage the following figures will result. 



Part of the work of this shop will be charged as direct 
labor on job tickets. On such work a burden charge of 10 
cents per man-hour will amply cover the shop expenses prop- 
erly chargeable to this work. The rest of the work will be 
done for factory betterments, general repairs, etc., on general 
and special orders, and will carry & burden charge sufficient 
to wipe out the remainder of the shop expenses at the end of 
the year, if it is a year of normal business. 

Foundry. Making Castings for four Classes of Product 
A, B, C, D. 

The charge for pig iron and scrap can be made by adding 
to the weight of the finished product the proper percentage 
for loss in melting. The charge for fuel can also be esti- 
mated from the weight of the finished product. The cost of 
direct labor is obtained from the job tickets of the molders 
and coremakers. 

The wages of the melter and of his helper and the cost for 
power may be apportioned to tonnage, and charged at a 
certain price per ton of product to the several jobs, the price 
varying with the class of product. 

The cost for interest, for depreciation of equipment, for 
sand and other supplies, for crane service, and for all other 
items of general expense, including foreman's wages and other 
indirect labor that cannot directly be allocated to the several 
jobs must be apportioned to them on some equitable basis. 

Suppose we have a foundry making 10 tons of castings per 
week, divided into four classes. A, 4 tons; B, 3 tons; C, 2 tons; 
D, 1 ton (tons of 2000 pounds) . The pay roll is $186 per week, 
of which $108 is direct labor of molders and coremakers, 
charged to jobs, and $78 is indirect (foreman, melter and 
laborers). A careful estimate by the foreman divides the 
labor among the four classes as follows: 



$500 
$2400 




A 


B 


C 


D 


Total 


2100 
500 
$5000 
4 »^ j:.^^ 


Product i>er week, lbs. 
Indirect labor cost 
Indirect labor, cents per lb. 


8000 
8.00 
0.1 


6000 

24.00 

0.4 


4000 

30.00 

0.75 


2000 
16.00 
0.8 


20,000 

$78.00 

0.39 





A 


B 


C 


D 


Total 


Labor, Direct 


16 


38 


40 


14 


108 


Indirect 


8 


24 


30 


16 


78 


Labor, Total 


24 


62 


70 


30 


186 


Indirect % of Direct 


50 


63.2 


75 


114.3 


72.2 


Man-hours, Direct 


60 


140 


140 


60 


400 at 0.27-1108 


Indirect cort, at 












I9.5(f per hourof 












direct labor 


11.70 


27.30 


27.30 


11.70 


400 at 19.5- 78 


At 72 2 % of direct 












wages 


11.55 


27.45 


28.89 


10.11 


78.00 


By estimate, as 












above 


8.00 


24.00 


30.00 


16.00 


78.00 , 



The indirect labor cost of one class of castings is 8 times 
that of another, showing that an attempt to estimate the 
indirect labor cost at a uniform figure, such as i cent per lb., 
will lead to very erroneous results. 

Suppose the cost of fuel, of power, and of repairs of cupola 
foots up to $60 per week, and the cost for interest and depre- 
ciation of plant and the cost for minor supplies together 
amount to $40 per week, the first may be divided in propor- 
tion to the tonnage and the second according to the direct 
man-hours, and we obtain the total burden as below: 





A 


B 


C 


D 


Total 


Fuel, etc. 

Interest, etc. • 
Indirect Labor 


24 
6 
8 


18 
14 
24 


12 
14 
30 


6 
6 
16 


$60 
40 
78 


Total Burden 

Burden per man-hour 

Burden per cent of direct wages 

Burden, cents per pound 


38 

$0,633 

237 
0.475 


56 

0.40 

147 

0.933 


56 

0.40 
140 
1.40 


28 

0.467 
200 
1.40 


178 

0.445 
165 
0.89 



It is ad\Tsable to divide the cost-accounting of the foundry 
into two parts, (1) cost per poimd of melted metal in the 
ladles; (2) all other costs, by classes, per pound of finished 
product. (1) includes the raw material, fuel for the cupola, 
ladle and cupola repairs, power for blast and other purposes, 
and all labor and burden that belong to the cost of melted 
metal, while (2) includes fuel for the core ovens, sand and 
other supplies, and all labor and burden involved in turning 
the melted metal into finished product. 

Polishing and Plating Rooms (10 men). In the grinding 
and polishing room as each piece is handled separately all the 
labor can be entered on job tickets as direct labor. In the 
plating room, since the goods are commonly handled in mass, 
pieces belonging to many different orders often being in the 
bath at the same time, all the labor may be considered as 
indirect labor, not directly chargeable to definite jobs. The 
plating room supplies also are used in mass, and their cost is 
an indirect expense, apportionable to the jobs either on the 
basis of an estimate by the boss plater, or as a result of an 
investigation of the cost of large lots of pieces of the same or 
similar size and shape. By such investigation a schedule may 
be made giving the amount that should be charged for plating 
per piece or per 100 pieces of different kinds of goods. 



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BOOKKEEPING AND COST ACCOUNTING 



Grinding Room. 

Equipment: 

Cost 12000 

Interest, Depreciation, etc., 20% 

Annual Cost of Wheels, Repairs and Supplies 

Cost of Power, Heat, Light, etc. 



$400 
600 
200 





$1200 


Share of factory cost lor superintendence and indirect 




labor 


300 




$1500 


Direct Labor: 




6 Grinders and Polishers, 40^ per hr.. 2500 hrs. 


$6000 


Total Annual Cost 


$7500 


Plating RoonL 




Equipment: 




Cost 12000 




Supplies, and all expense eicept labor 


$2500 


1 Plater 


900 


1 Helper 


600 


1 Cleaner 


500 


Other labor 


1500 



Total Annual Cost 



$6000 



The Grinding-room Burden may be charged as 25 per cent 
of the direct labor cost, or at 10 cents per man-hour, in both 
cases making the total S1500 in a normal year. 

The total cost of the plating room, $6000 per year, is all 
indirect, and it is to be distributed to the goods plated accord- 
ing to estimate or schedule of prices. 

Example of Figuring Burden on Jobs or Three Machines. 
Suppose three machines, a large boring mill, a large planer, 
and a small lathe, are each operated 50 hoiu^ in a we^, and 
that three men are available as operators, whose wages are 
respectively 20, 30 and 40 cents per hoiu*. Assume that in 
different weeks the three men each are changed around so 
that each man has a week on each machine. Assume also 
that the work of a machine for a whole week may be on one 
job or on twenty different jobs, requiring twenty job tickets. 
Four methods of apportioning burden are considered, viz.: 
(1) 80 per cent on direct labor cost; (2) 24 cents per man- 
hour, (3) machine-hour-rate, $1.10, $0.66 and $0.23 for the 
three machines, respectively. (4) Machine-hour rate $1.05, 
0.61 and 0.18 with a job charge of 20 cents per job. It is 
required to compute the burden by each system. 



Wages per hour 
Wages for 50 hours 
(Burden (1) 80% on direct labor 
Burden (2) 24 ff per man-hour 



Burdens (1) and (2) are independent of the machine rates. 
Burdens (3) and (4) are independent of the hourly rate of 
wages. 




Burden (3) 50 hours X rate - 

Burden (4) 50 hours X modified rate + 

20 eent Job charge: 

a. single Job 

6. 20 jobs 



Boring 
MiU 



$55.00 



52.50 
56.50 



I 



Planer 



$33.00 



30.50 
34.50 



Lathe 



$11.50 



9.00 
13.00 



From the above figures it will be seen that, according to 
the method of computing burden, the product of the lathe 
for a given time may be charged a burden ranging from $8 
to $13.00, that of the planer from $8 to $34.50, and that of 
the boring mill from $8 to $56.50. Of course, it is not likely 
that any manufacturer would charge for the rent, power, 
repairs and superintendence of a large boring mill or planer 
as low a figure as $8 or even $16 per week, but the figures 
show what large possibilities of error there are in adherence 
to old-fashioned methods of estimating burden. 

Departmental and Class-of-Product Burdens. Ha\'ing 
made a table of hourly burden rates for each machine in the 
shop, it is possible to avoid the vast amount of labor required, 
in a large shop making a great variety of small products, of 
entering the burden on each job ticket. The method of 
doing this is to divide the total product into classes, according 
to its kind, weight, finish or other feature by which it may 
most easily be distinguished, giving them symbols, as Class 
A, 'B, C, D, E, and to divide the whole factory into depart- 
ments, either by rooms or by groups of rooms or parts of 
rooms, classifying them by the kind of work done in them, 
or the size or kind of tools used in them, s>inbolizing them as 
VH, H, M. L, VL, meaning very heavy, heavy, light, very 
light, or in any other suitable way. Taking the list of tools 
in the machine shop we may group them in five departments, 
thus: 



Symbol 


VH 


H 


M 


L 


VL 






No. of Tools 

Average hourly burden, 
(d) centa 


7 
55 


II 
40 


27 
25 


44 
15 


30 
12 



These {d) rates are those corresponding to the sum of the 
(a), (6), (c), colunms of the table on page 68. To them are 
to be added the residual burden for salaries and indirect labor 
that may be apportioned not to the departments or to the 
classes of machines, but to the classes of the product. We 
may then construct a department-and-class burden table, 
something like the following, the small letters representing 
figures that have to be computed or estimated. 



Department. . 


VH 


H 


,, 


L 


VL 


Class of 






Hourly Burden 






Product 












A 


a 


b 




c 


d 


1 e 


B 


f 


g 




h 


i 


1 J 


C 


k 


1 




m 


n 


1 o 


D 


P 


q 




r 


8 


' t 


E 


u 


V 




w 


X 


y 



In all that has preceded we have assumed that the burden, 
whether figured as a percentage on direct labor, as a charge 
per man-hour or per machine-hour or a departmental or a 
class biu-den, or a combination of them, is a " normal " or 
" standard " burden, that remains fixed for a year or more, 
independent of changes of amount of sales from month to 



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DISTRIBUTION OF BURDEN 



73 



month or of stoppages of any part of the works due to acci- 
dents, strikes, etc. The burdens are added to the charges for 
material and for direct labor to obtain what may be called 
the " inventory cost " of the goods produced, their value in 
the warehouse, from which profits of the business may be 
computed, and which may be used as a basis of minimum 
selling prices. 

Example. Suppose $100,000 direct labor is divided among 
classes and departments as follows: 



The hours and wages in the departments and classes would 
be as follows (in thousands) : 



Dcpt.. 



M 



Total 







Thouaands of Dollars 




Class A 


6 


1 


10 


3 


20 


B 


4 


I 


17 


4 


26 


C 


1 


1 


24 


2 


28 


D 


15 


2 


8 


' 


26 




26 


5 


59 


10 


100 



If this labor represents 400,000 hours an average of 25c. 
per hour, and the burden was calculated on the old method 
of a uniform (say 80 per cent) percentage in direct labor cost, 
the burden would be, in thousands of dollars, by classes and 
departments. 



Dept 


L 


M 


N 


P 


Total 






Class A 
B 
C 
D 


4.8 
3.2 
0.8 
12.0 


0.8 
0.8 
0.8 
1.6 


8.0 
13.6 
19.2 

6.4 


2.4 
3.2 
1.6 
0.8 


16 

20.8 
22.4 
20.8 




20.8 


4.0 


47.2 


8.0 


80. 



If the burden was calculated on the man-hour system and 
it was assumed that all the labor was paid a uniform rate of 
25 cents an hour, the same burden for each class and depart- 
ment would be found, but suppose that the average wage in 
the several departments was different, say 20, 25, 29.5 and 
20 cents, respectively, in the several departments, and the 
total wages divided as follows: 



Deot 


L 


M 


N 


P 


Total 






Bouts 

At. Wages* cents 

Wages, Thous. 


130.000 
20 
26 


20.000 
25 

5 


200.000 
29.5 
59 


50.000 
20 
10 


400.000 
25 
100 


and the burden was taken at 20 cents per man-hour, the total 
burden for the four departments would be 




L 


M 


N 


P 


Total 


In thousands of 

doUan 
Instead of 


26 
20.8 


4 
4 


40 
47.2 


10 

8 


80 
80 





L 


M 


N 


P 




Class 


Hours 
at .20 




Hours 
at .25 




Hours 
at 29.5 




Hours 

1 at .20 

1 




Total 
Hours 




A 


30 


$6 


4 


$1 


33.9 


$10 


15 


$3 


82.9 


$20 


B 


20 


4 


4 


1 


57.63 


17 


20 


4 


101.63 


26 


C 


5 


1 


4 


1 


81.35 


24 


10 


2 


100.35 


28 


D 


75 


15 


8 


2 


27.12 


8 


5 


1 


115.12 


26 




130 


26 


20 


5 


200.00 


59 


50 


10 


400.00 


100 



and the burdens, calculated respectively at 20 cents per man- 
hour, in thousands of dollars. 



Class Dept. 


L 


M 


N 


P 


Total 


A 
B 
C 
D 


6 

4 

1 

15 


0.8 
0.8 
0.8 
1.6 


6.78 
11.526 
16.270 

5.424 


3 

4 
2 


16.58 
20.326 
20.070 
23.024 


Equivalent to per cent on 
direct labor 


26 
100 


4.0 
80 


40.000 
67.8 


10 
125 


80.000 
80 



This method is better than the percentage of direct labor 
method in that it takes account of the difference in average 
wages in different departments, but it is still unsatisfactory 
in that it fails to take account of the fact that the cost of 
superintendence, repairs, and indirect labor generally, for 
each job in any department is not directly proportional to 
either the hours of direct labor or to the wages paid for direct 
labor. For example, two men may be working for the same 
wages on machines of the same kind and cost, but one is 
doing repetitive work, requiring scarcely any attention from 
tool-setters, foremen or indirect labor of any kind, while the 
other is doing a great variety of work, requiring much service 
from the foreman, time-setters, order and cost clerks, store- 
keepers, etc. It is evident that a much higher burden should 
be charged in the latter case than in the former. It is evident 
that the burden charge, whether a man-hour rate or a per- 
centage on direct-labor cost should vary both with the 
department and with the class of product. 

Example. Let the total direct labor in a normal year be 
$100,000 subdivided by departments and classes as in the 
preceding example, and let the total burden, as before, be 
$80,000. It is found by study of the statistics of the pre- 
ceding years that $20,000 of this burden is what we have 
before called the (a), (6), (c) burden of machines, consisting 
on interest, taxes, insurance, depreciation, and maintenance, 
power, light, and cost of space occupied, and that $60,000 is 
the total cost for superintendence and other indirect labor, 
and for other general expenses, such as supplies. 

Taking the direct labor at 400,000 man-hours per year, 
$20,000 is equivalent to an average (a), (6), (c) burden of 
5 cents per man-hour, but subdividing it into departments it 
may be apportioned as follows: 



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74 



BOOKKEEPING AND COST ACCOUNTING 



Departments 


L 


M 


N 


P 


Total 






hours 
(a), (b). (c) Burden 
Cents per man hour 


130 
$4000 
3 


20 

3000 

15 


200 
10.000 

5 


50 

3000 

6 


400 
20.000 

5 



Departments 


L 


M 


N 


P 






Class A 


30 


50 


20 


25 


B 


20 


40 


15 


20 


C 


15 


30 


10 


15 


D 


10 


20 


5 


10 



A careful estimate by the cost departfnent to apportion the 
residual $60,000 to the several classes atid departments gives 
the following approximate figures, cents per man-hour. 



Adding these figures to those already found for the (a), (6), 
(c) biu-den and taking the subdivisions of the direct labor 
costs as before, we find the total burden charges as below. 









Standard Bubden Ratba and Chabqes bt 


Departuents and Classes 








Dept. 


L 


M 


N 


P 




Class 


Thousand 
Hours 


Rate 


Amount 


Thousand 
Hours 


Rate 


Amount 


Thousand 
Hours 


Rate 


Amount 


Thousand 
Hours 


Rate 


Amount 


Total 


A 
B 
C 
D 


30 

20 

5 

75 


0.33 
.23 
.18 
.13 


$9,900 

4.600 

900 

9,750 


4 
4 
4 
8 


0.65 
.55 

.45 
.35 


$2600 
2200 
1600 
2800 


34 
58 
81 
27 


0.25 
.20 
.15 
.10 


$8,500 
11.600 
12.150 
2.700 


15 
20 
10 

5 


0.31 
.26 
.21 
.16 


$4,650 

5,200 

2.100 

800 


$25,650 
23.600 
16.950 
16.050 




130 


$25,150 


20 


$9400 


200 


$34,950 


50 


$12,750 


$82,250 



The total S82,250 is sufBciently close to the $80,000 total thousands of dollars, obtained by the three methods we 
estimated burden. Comparing the amounts of burden, in have: 









Total Burdens, Tbottbands of 


Dollars 












Dept. 


L 


M 


N 


P 


Class 


(1) 


(2) 


(3) 


(1) 


(2) 


(3) 


(1) 


(2) 


(3) 


(1) 


(2) 


(3) 


A 

B 
C 
D 


4.8 
3.2 
0.8 
12.0 


6 

4 

15 


9.9 
4.6 
0.9 
9.8 


0.8 
0.8 
0.8 
1.6 


0.8 
0.8 
0.8 
1.6 


2.6 
2.2 
1.8 
2.8 


8.0 
13.6 
19.2 

6.4 


6.8 
11.5 
16.3 

5.4 


8.5 
11.6 
12.2 

2.7 


2.4 
3.2 
1.6 
0.8 


3 
4 
2 

1 


4.6 
5.2 
2.1 
0.8 


Per cent of direct labor 


20.8 
80 


26 
100 


25.2 
97 


4.0 
80 


4.0 
80 


9.4 
188 


47.2 
80 


40.0 
67.8 


' 35.0 
59.3 


8.0 
80 


10 
100 


12.7 
127 



Adding these burden figures to the figures for direct labor 
in the first table, we obtain for the total labor and burden 



cost by the three methods of computing burden, the following, 
in thousands of dollars: 











Total Labor and 


Burden Costs 












Dept. 


L 


M 


N 




P 




Qass 


(1) 


(2) 


(3) 


• 
(1) 


(2) 


(3) 


(1) 


(2) 


(3) 


(1) 


(2) 


(3) 


A 

B 
C 

D 


10.8 
7.2 
1.8 

27 


12 
8 
2 

30 


15.9 
8.6 
1.9 

24.8 


1.8 
1.8 
1.8 
3.6 


1.8 
1.8 
1.8 
3.6 


3.6 
3.2 
2.8 
4.8 


18 

30.6 
43.2 
14.4 


16.8 
28.5 
40.3 
13.4 


18.5 
28.6 
36.8 
10.7 


5.4 
7 2 
3.6 
1.8 


6 
8 

4 
2 


7.6 
9.2 
4.1 
1.8 



(1) Percentage on direct-labor method of computing year in computing standard or inventory costs. They 



burden. 

(2) Man-hour rate; uniform. 

(3) Machine-hour or man-hour rate, modified by depart- 
ment estimates. 

The modified burden rates considered in this example 
are standard man-hour rates to be used throughout the 



may be converted into percentage on direct-labor rates 
by dividing the burden figures in dollars, given in the 
table, by the several direct-labor charges. The following- 
table gives the percentage-on-direct-labor rates for the 
several classes in comparison with the corresponding man* 
hour-rates. 



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75 



Dept. 


L 


M 


N 


P 




Man- 


Per 


Man- 


Per 


Man- 


Per 


Man- 


Per 


Gan 


hour 


cent 


hour 


cent 


hour 


cent 


hour 


cent 




rate 


rate 


rate 


rate 


rate 


rate 


rate 


rate 


A 


0.33 


165 


0.65 


260 


0.25 


65 ! 


0.31 


153 


B 


.23 


115 


.55 


220 


.20 


66 i 


.26 


130 


C 


.18 


90 


.45 


160 


.15 


5» 


.21 


105 


D 


.13 


65 


.35 


140 


.10 


34 ! 


.16 


80 



The man-hour rates will, in general, be much more accurate 
than the percentage rates unless the wage rate throughout 
a given department is nearly uniform. The only excuse for 
using the percentage rates is that they involve less clerical 
labor than the man-hour rates. 

The above-described method of computing standard burden 
rates by classes and departments is, of coiu^, not as accurate 
for a machine shop doing a great variety of work with dif- 
ferent kinds of tools, as the standard machine-hour-rate, 
modified, as described on page 69, by consideration of the 
conditions under which the several machines run and also by 
the device of adding a job charge on each job ticket. 

The question whether to use the most accurate cost system, 
in whole or in part, or some other s^'stem which may be less 
accurate but requiring less clerical work, must be determined 
for each business separately, with reference to the use that is 
to be made of the system, the degree of accuracy that the 
business needs, and the cost of operating the cost system 
itself. 

The Use that is Made of the Normal Burden Figures. 
Recapitulating the different methods of calculating and 
apportioning burden, we have 

(1) Percentage on Direct Labor, (A) imiform, (B) by 
departments, (C) by classes, (D) by departments and classes 
combmed. 

(2) Charge, cents per man-hour. (A) uniform, {B) by 
departments, (C) by classes, (D) by departments and classes 
combined. 

(3) Machine-hour rate — Hourly charge for each machine, 
dependent on the machine and on the conditions of its opera- 
tion. 

(4) Machine-hour rate with job charge added. 

(5) Either of the above with material burden charge added. 
A short example is here given to show the application of 

these several methods. Three men. Smith, Brown and Jones, 
each working 10 hours in one day in a certain factory under 
the following conditions: 



Wages per hour» cents 

Machine No. 

No. of jobs in a day 

Class of Product 

Department 



Smith 


Brown 


20 


30 


I 


2 
1 


A 


B 


L 


N 



Jones 

40 
3 
10 
C 
P 



Burden Methods: 

(l) d— 100% on direct labor cost 
6— L, 80; B, 100; P 120%. 
e— A, 120; B, 100; C, 80. 
d—AU 90; BN, 100; CP, 90. 



(2) a — 30 cents per mt n-hour. 
b—U 25; N, 30; P. 35 cent. 
e— A, 35; B, 80; C, 25 cents, 
d— AL, 40; BN, 8Q; CP, 20 cents. 

(3) Mach. Hr. Rate— No. 1. 40; No. 2, 30; No. 3, 20 cents. 
/ Mach. Hr. Rate— No. 1. 35; No. 2. 25; No. 3. 15 cents. 
\ Job cfaarse added per job, 10 cenU. 

BvBDBN Charges for 10 Hours 



(4) 



Method 


Smith 


Brown 


Jones 


(1) a 


2.00 


3.00 


4.00 


b 


1.60 


3.00 


4.80 


c 


2.40 


3.00 


3.20 


d 


1.80 


3.00 


3.60 


(2) a 


3.00 


3.00 


3.00 


b 


2.50 


3.00 


3.50 


e 


3.50 


3.00 • 


2.50 


d 


4.00 


3.00 


2.00 


(3) 


4.00 


3.00 


2.00 


(4) 


3.60 


2.60 


2.50 


Wages per 10 hrs. 


$2.00 


$3.00 


$4.00 



Smith's biu*den ranges from 80 per cent to 200 per cent of 
his wages, and Jones's from 50 per cent to 120 per cent accord- 
ing to the method of burden charge used. 

It appears from the above table that the burden on Brown's 
10 hours is the same no matter what burden method is used 
(except No. 4 in which there is a job charge), but this happens 
only because the rates of burden were so chosen that the 
average burden by either method was equal to the average 
wage. 

Suppose that the cost of material in each case was $1.00, 
the total cost would range as follows: 





Smith 


Brown 


Jones 


Labor 

Burden 

Material 


$2.00 

$1.60to4.00 

$1.00 


$3.00 

$2.60 to 3.00 

$1.00 


$4.00 

$2.00to4.80 

$1.00 




$4. 60 to 7.00 


$6.60 to 7.00 


$7.00 to 9.80 



If the smallest burden is the most accurate in each case 
then if the highest burden is used the total cost in Smith's 
case is overestimated $2.40 or 50.2 per cent; Brown's $0.40 or 
6 percent, and in Jones's $2.80 or 40 per cent. 

The burden computed by either of the four methods 
illustrated above may be modified by adding to it a charge 
for burden on material. The cost of material delivered to 
the tools in a shop includes not only its purchase price but 
also the cost for freight, drayage, handling in stores, insur- 
ance, interest on the cost while stored, crane or truck 
service, and for shrinkage, breakage, spoilage or other dete- 
rioration in value. These extra costs will vary with dif- 
ferent kinds of material. They may be added as " material 
burden " on the job tickets, but usually it will be found 
better to have the storekeeper add them on his perpetual 
inventory cards or on his stores issue tickets when charg- 
ing the shop for material delivered from the stores. 



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BOOKKEEPING AND COST ACCOUNTING 



In an actual facton^ the question of which method of cal- 
culating and r.pportioning the burden should be used can be 
properly determined only after a careful consideration of the 
nature of the business and an examination of the statistics 
of a normal year or the average for several years, together 
with an estimate of the amount of clerical labor required for 
each method. The machine-hour method is not so formid- 
able as it may appear, for the listing of the machines, of the 
space they occupy and of the charge for interest, depreciation, 
power, etc., need be made only once for all, with revisions 
once a year. 

The application of the machine-hour rate to the job tickets 
in many lines of business need not be made on all the tickets 
throughout the year, if the clerical labor of doing it is con- 
sidered excessi\'B, but only on jobs of each particular kind or 
class once or twice a year if the conditions of such jobs are 
approximately uniform. 

When burden is calculated as a percentage on the cost of 
direct labor, and the product is of a varied kind, made on 
different machines and involving expenses for rent, interest, 
depreciation, power, etc., which have no uniform relation 
to direct labor costs, the recorded, or bookkeeper's, costs are 
useless, false and misleading. 

Suppose two products A and B are made in a factory each 
costing $500 for material, $1000 for direct labor; by the per- 
centage or labor method of computing burden, the burden on 
each is $1000, but by the more accurate machine-hour rate 
method the burden on A is $500 and that on B $1500. Sup- 
pose the selling expense on each is $500, and that each product 
is sold for $3300. The accounts then show the following: 





Average or 
percentage 
Burden 


Burden on Machine- 
hour method 




AorB 


A 


B 


Material 
Direct Labor 
Burden 


$ 500 

1000 
1000 


$ 500 

1000 
500 


$ 500 
1000 
1500 


Total Factory Cost 
Selling Expense 


2500 
500 


2000 
500 


3000 
500 


Min. or no profit selling prioe 
Sold for 


3000 
3300 


2500 
3300 


3500 
3300 




Profit 300 


Profit 800 


Loss 200 



If, at the taking of the inventory A has been sold, while B 
remains unsold, the books will show, if the burden is figured 
on the percentage on labor method, Profit on A $300; inven- 
tory value of B $2500; but if the burden is figured on the 
machine-hour rate method the profit on A will be shown to 
be $800 and the inventory value of B $3500, so that the per- 
centage of labor method causes an underestimate of both 
the profit and the inventory value. 

On the other hand, if B is sold and A remains unsold, the 
books show, on the percentage method, profit on B $300; 
inventory value of A $2500; but on the other method, loss on 
B $200, inventory value of A $2000. In this case the per- 



centage of labor method causes an overestimate of both 
the profit and the inventory value. 

If the selling, prices of these products is fixed at 10 per cent 
in ftdvance on the sum of the factory cost and the selling 
expense, the prices of both A and B, by the percentage on labor 
method wdll be $3300, but by the more correct methods the 
price of A will be $2750 and that of B $3800. By the per- 
centage on labor method A will be overpriced $550 and B 
underpriced $550. 

Keeping Labor and Material Cost only without Appor- 
tioning the Burden. In large factories making products 
in hundreds or thousands of varieties it is found that the cost 
of the vast amount of bookkeeping and clerical work involved 
in keeping an account of the cost, detailed, including burden 
of every article and every operation, is far greater than is . 
warranted by the benefits derived from the cost-keeping 
system. In such cases the " factory costs " or inventory 
values of finished goods delivered to the warehouse are 
commonly determined by " estimates," made from frequent 
investigations during limited periods, of the material and 
labor costs of certain representative parts of the product, 
and additions for burden are made from an examination of 
such statistics as are available. Such estimates are apt to 
be grossly inaccurate, and great care must be taken not to 
make them too high, thus inflating inventory values, or too 
low, leading to the fixing of non-remunerative selling prices. 

Classification of Total Expenditures by Percentages. 
Henr>' R. Towne (Trans. A. S. M. E. vol. 34, 1912), gives the 
following table, relating to four distinct lines of actual product, 
in which the several elements have been reduced to terms of 
the actual cost of the product when finished and sold. 





No. I 


No. 2 


No. 3 


No. 4 


L Productive Labor 
M Productive Material 


♦28 
38 


17 
33 


29 
25 


19 
27 


PC Prime Coat 

ME Manufacturing Expense 


66 
24 


50 
20 


54 
28 


56 
22 


6C Shop Cost 

CE Commercial Expenses 


90 
10 


70 
30 


82 
18 


78 
22 


AC Actual Cost 


100 


100 


100 


100 



Another way of showing the relative percentages of the 
several elements of cost is to reduce them to percentages of 
the shop cost, which is taken as 100. 





No. I 


No. 2 


No. 3 


No. 4 


L 
M 


31 
42 


24 
47 


35 
30 


24 
48 


PC 

ME 


73 
27 


71 
29 


65 
35 


72 
28 


sc 

CE 


100 
II 


100 
43 


100 
22 


100 
28 


AC 


111 


143 


122 


128 



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DISTRIBUTION OF BURDEN 



77 



If there is any need of expressing the elements of cost in 
the form of percentages of some total, the second method seems 
to be the better one. The term " actual cost " is not prop- 
erly descriptive; it should read "total cost to make and 
sell." When goods are in the warehouse, charged at factory' 
cost, the cost of selling is an indeterminate quantity until 
after they are sold, and it will vary with every sale. It is 
doubtful if any method of expressing costs as percentages is 
of any practical value. The fact that the ratio of PC to 
ME is as 73 to 27 for one article and as 65 to 35 for another 
is of no particular significance. Nor is the fact that the 
ratio of ME to L is as 27 to 31 in one case and as 29 to 24 in 
another. What is needed in cost-keeping is the amounts of 
the several elements and the totals, not percentages. 

The Ratio of " Non-Productive " to " Productive " Labor.* 

With the growth of competition within the last twenty years 
the necessity for some knowledge of costs became evident, and 
the manufacturer turned to the accountant for a system of finding 
costd. The cost accountant promptly gave him what he called 
the ratio of "non-productive" to "productive" labor, which he 
said should be low for good management. By " non-productive " 
labor he meant salaries of all kinds, and all other labor that could 
not be charged directly to an order, including miscellaneous 
labor such as watchmen, sweepers, truckmen, etc. By "pro- 
ductive" labor was meant simply that labor which could be 
charged directly to an order. 

While the ratio of operating expense to total income may be a 
fair measure of eflSciency in a transportation company, the ratio 
of "non-productive" to "productive" labor is not only not a 
fair measure of the efficiency' of operation in a manufacturing 
plant, but is often exactly the reverse. 

To my mind the widespread use of this ratio as a measure of 
efficiency has been more effective in producing inefficiency than 
any other single factor, except the oft-repeated statement that 
you must have low wages if j'ou would have low costs. Until 
these two fallacies are absolutely discredited, we cannot expect a 
solution of our most serious troubles. 

In a factory where this ratio was used as a guide the following 
incident occurred: A foreman had ten men on a job, which he 
said could be done by eight if he could have a boy to supply 
them with work. He said, however, that if he made the chaiige, 
the boy's wages would be called "non-productive" labor and his 
ratio would go up, with the result that he would be criticised, so 
he did not make it. 

In the U. S. Navy an energetic officer studied the loading of 
ammunition and very much reduced the direct labor employed, 
but, being unable to reduce the indirect labor in the same propor- 
tion, the above ratio went up. He came in for very severe crit- 
icism, notwithstanding the fact that his total labor had been 
decidedly reduced. 

A PROBLEM m BURDEN CHARGING 

Suppose a plant has two machines of the same kind but 
different sizes, No. 1 and No. 2. The total monthly burden 
(,one-twelfth of the yearly burden) of No. 1 is $24, and of No. 2, 
$36, or respectively 10 and 15 cents an hour for full time, 240 
hoiu*s per month. But the average or normal running time 
during a year is 160 hours or two-thirds time for No. 1, and 
120 hours or half time for No. 2. The normal hourly burden 
charge credited to the two machines and charged to the cost of 
product is therefore 10X2404-160=15 cents for No. 1 and 

* Extracts from a paper on "Measuring Efficiency" by H. L. 
Gantt. Trans. A. S. M. E., 1914. 



15X2404-120=30 cents for No. 2. Suppose that in a 
normal month each machine has only one job, costing as fol- 
lows, the cost including the normal burden charge and labor 
at 20 cents an hour. 



Mach. No. I, Job. No.l, 

160 Hrs. 
Mach. No. 2, Job No. 2, 

120 Hrs. 



Labor 



$32.00 
24.00 



Burden 



$24.00 
36.00 



Total 



$56.00 or 20 + 15 «35^ per hour 
60 . 00 or 20 +30 « 50^ per hour 



Job No. 1 can be done on either machine. Job No. 2 only 
on No. 2 machine. In a certain month Job No. 3, 80 hours, 
comes in, and it can be done on either machine, costing as 
follows, if the normal burden is charged: 



Job No. 3, Mach. No. I, 80 hni. 
Job No. 3, Mach. No. 2, 60 hrs. 



Labor 



$16.00 
16.00 



Burden 



$12.00 
24.00 



Total 



$28.00 
40.00 



Making an apparent saving of $12 by doing the job on 
No. 1 machine. But the saving is only apparent, for the 
burden on No. 2 machine runs on (except the slight difference 
on the cost of the fuel burned in the power plant when the 
machine is running or idle) whether the machine runs or not. 

Suppose that Job No. 1 is a regular job, taking about the 
same time every month, and that jobs Nos. 2 and 3 are irreg- 
ular, varying from to 120 hours each in different months, 
and in some months both No. 1 and No. 2 machines may be 
run part time on both of these jobs. Now the problem is 
what burden shall we charge to the cost of the several jobs 
under these different conditions as to the number of hours 
each machine runs in a month. In a busy month, when No. 1 
machine runs full time what shall be its hourly burden, and 
in a dull month, when No. 2 machine runs only J of fuD time 
or i of its normal time what shall be the hourly burden charge 
for the use of that machine? If No. 2 machine is idle all the 
month, shall the loss due to its idleness be made up by charging 
an extra or " supplementary " burden on the work done on 
No. 1 Machine? 

Those writers and accountants who hold that " the cost of 
manufactured products made during a certain period equals 
the total expenditure of the business for the same period," 
would answer these questions by saving that the total burden 
of these two machines for a month, $24 for No. 1 and $36 for 
No. 2 must be allotted to the cost of the product of that 
month. We may assume, for convenience of illustration, 
that the shop is " departmentalized " in the cost-accounting 
system, and that these two machines constitute the whole of 
one department. They would say that if No. 2 machine is 
idle, its burden $36 must be added to the $24 burden of No. 1 
machine and charged against the product of that machine, 
making its hourly rate, if it runs 160 hours a month $60+160 
=37.5 cents instead of 15 cents. If it ran full time, 240 
hours, its hourly rate would be $60 -^240 =25 cents, and if it 
ran half time, 120 hours, the rate would be $60 -^ 120 = 50 cents. 



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BOOKKEEPING AND COST ACCOUNTING 



On the other hand, if No. 2 machine ran 120 hours and its 
product were charged with its normal burden, 120X30 
=136.00, machine No. 1 would have no supplementary rate, 
if it ran its normal time of 160 hours, and its burden would be 
15 cents an hour, and if it happened to run full time, 240 
hours, the supplementary rate would be a negative quantity 
and the hourly burden charged to the cost of the work done 
on No. 1 machine would be only $24 -^240 = 10 cents. 

If, however, we follow the normal hourly burden method, 
the amount of burden to be charged to cost of product would 
be independent of the number of hours that either machine 
happened to run in any given month; it would be 15 cents 
per hour on No. 1 machine and 30 cents per hour on No. 2 
machine. The burden charged to cost of product would 
then be as follows for the several conditions named. 





No. 1 Machine 


Unearned 


Over-earned 






burden, loss 


burden, gain 


Half time 


I20hra.xl5ff-$I8 


%6 




H full, Bormal time 


160hr8.Xl5 - 24 







Full time 


240hr8.Xl5 - 36 
No. 2 Machine 





$12 


H full time 


80hr8.X30ff-$24 


$12 




H time, normal time 


120hr8.X30 - 36 







Full time 


240hr8.X30 - 72 





$36 



The unearned burden may be charged and the overearned 
burden credited to Profit and Loss each month, or they may 
remain in Burden account, which is charged with the total 
factory overhead expense each month and credited with the 
total earned burden which has been charged to product, the 



balance of the account being closed into Profit and Loss at 
the end of the year. 

An important exception must be noted to the rule of charg- 
ing to the cost of product of a machine the normal hourly 
burden rate of that machine. It is in the case of a machine 
that bears a large burden being used to do work that is 
ordinarily done on a machine with a smaller burden because 
the first or larger machine happens to be available at the time 
and is not needed for other work, while the second machine is 
crowded with work. In that case the burden charged to 
cost of the work done in the more costly machine should be 
the normal burden of the smaller machine. The fact that 
the smaller burden should be charged in such a case should 
be entered on the Job Card when it is issued from the planning 
room for a job to be done on a large machine that could be 
done on the smaller machine, so that when the card reaches 
the cost-keeper he will not make the error of charging th** 
larger burden. 

Another Problem. Thirty machines, symbol A, B, C, 
ordered in January to be delivered before April 1. A machine 
consists of 3 pieces A, B, C, connected by 30 bolts and nuts 
per machine. Only one operation is necessary on each piece. 
A, weighing 200 pounds, is bored and faced on a large boring 
mill. B, 100 pounds, is turned in a 30-inch lathe and C, 50 
pounds, is turned on a 10-inch lathe. Some work is done on 
each of three months, the greatest amount in March, when 
the factory is running at less than half capacity. In Jan- 
uary and February, the factory is running at 80 per cent of 
capacity. Labor costs decrease, from month to month as 
better working tools are provided and as workmen get more 
skill in handling the pieces. 





Jan. 


1 
Fbb. 


Mar. 


A 


B 


C 


A 


B 


C 


A 


B 


C 




5 


10 





15 


10 


20 


10 


10 


10 


Castings machined 


5 


5 





10 


15 


^5 1 


15 


10 


15 


Hours per piece 


10 


6 





9 


5 


3 1 


8 


4 


2 


Wages per hour, cents 


20 


25 


30 


20 


25 


30 


?0 


23 


30 


Av. Burden on Mach., cents. 


40 


25 


20 


40 


25 


20 


40 


25 


20 


Supplementary Burden — 




















Church's method, cents 


5 


5 


5 


10 


8 


6 


20 


15 


10 


ToUl Burden, cents 


45 


30 


25 


50 


33 


26 


60 


40 


30 


Wages plus Burden, per hr. cte. 


65 


55 


55 


70 


58 


56 


80 


65 


60 


Wages plus Burden, per piece 


$6.50 


$3.30 


$1.68 


$6.30 


$2.90 


$1.68 


$6.40 


$2.60 


$1.20 


Wages A Av. Burden, per piece 
Total by Church's Method 


6.00 


3.00 


1.50 


5.40 


2.50 


1.50 


4.80 


2.00 


1.00 




$11.48 






$10.88 






$10.20 




Total by Average 




10.50 




- 


9.40 






7.80 





The figures $1.68 and $1.50 for C in January are taken from the February record, as no C pieces were made in January. 



The cost of castings, bolts, drilling bolt-holes, and assem- 
bling may be taken as the same each month, so they may be 
omitted from the problem. 

According to the figures the cost of labor and burden per 
machine A, B, C, varies from $7.80 to $11.48. What cost 
figure should be used in inventorying these machines on 
April 1, and what figure should be used in making estimates 
on machines to be built in the future? Evidently $7.80 is 
the correct figure, for this is the cost of labor and burden 



(exclusive of drilling and assembling) at which the machines 
can be reproduced. 

THE "SUPPLEMENTARY RATE" METHOD OP 
DISTRIBUTING BURDEN 

Mr. A. Hamilton Church in his little book on " The Proper 
Distribution of Expeiise Burden " {Engineering Magazine^ 
1908) describes a method of distributing burden which is 
based on the principle that the cost of the product of a shop 



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DISTRIBUTION OF BURDEN 



79 



in a given month must include all the shop charges of that 
month whether or not a large part of the machinery is idle. 
He describes the method as follows: 

"First, we consider each machine as an independent producing 
centre, allocating to such centres all the expenses and charges 
which can, on reasonable anal3r8is, be considered chargeable as a 
composite rent or machine rate method for all the factors of 
production therein concerned. Second, we charge to a monthly 
shop-charges accoimt all charges whatever incurred in that shop, 
including all the items specifically represented in fractional 
detail by the machine rates, and alao including, of course, such 
general items as cannot be represented in the machine rates, of 
which the most obvious item is the supervision of a head, or 
foreman. 

"Then as each machine is occupied on jobs, the latter are 
debited with so much per hour as machine rate, and, at the end 
of the month the total amount so earned is deducted from the total 
shop expenses, leaving a balance which is distributed over the 
same jobs as a supplemenlary rate. The ratio of the supple- 
mentary rate to the amount distributed by the machine rates 
forms a varying barometer, whose fluctuation is an index to the 
current efficiency of the shop. In proportion as all machines 
are not kept full of work all the time, this ratio of the supple- 
mentary rate to the amount distributed by the machine rates 
will begin to rise. The same effect will occur if any general kind 
of expenditure is increased. 

"There remains the question on what basis the additional 
distribution shall take place. It may be made into an hourly 
burden, or which is simpler may be reduced to a percentage of 
increase on the amoimt already distributed by the machine 
rate. ... It is to be preferred that the supplementary rate 
should be an hourly burden rate. 

*'Tke supplementary rate is the undistributed balance of shop 
charges due to idleness of productive centres J* 

Mr. Church's method was favorably received by many 
writers on accountancy, and was adopted by some account- 



ants who introduced it into shops. The author believes 
that he was the first to publish a condemnation of it. He 
was then, in 1909, introducing into a machine shop a system 
of cost accounting based on the machine-hour rate method, 
the hourly burden rates for the several machines being 
" normal " rates which were to be kept constant for a year 
or more, and obtaining a copy of Mr. Church's book wrote 
a brief review of it for the Iron Trade Review^ February 4, 
1909, in which appears the following: 

''The supplementary rate in its variations is not really an 
index of the current efficiency of the shop but it is an index of the 
condition of business generally, or of the efficiency of the selling 
department, which brings orders into the shop. The efficiency 
of the shop itself should be determined not by an accidental sup- 
plementary rate which may appear in each month but should be 
measmed by comparing the labor cost for a particular job done 
on a particular machine at one period of the year with another, 
the machine itself being charged with the same burden 
throughout the year. Attempts to charge to the cost of jobs in a 
particular month a supplementary rate whose variations are not 
due to any inefficiency in the shop management but entirely to 
accidental fluctuations in business outside of the shop, not only 
introduce great confusion in bookkeeping, but may give the 
management erroneous ideas as to what the real shop effi- 
ciency is." 

Application of the Supplementary Rate. Mr. Church 
gives an example of the use of his method as applied to some 
work done in a machine shop, which is given in condensed 
form below. In January the machines worked full time, 
consequently the supplementary rate was very low, 2} cents 
per hour; in November the shop worked barely half time 
and consequently the supplementary rate rose to 14 cents per 
hour. 



Shop Charges Account 



DCBtTB 



Credits 





Jan. 


Nov. 




Jan. 


Nov. 


InteiMt on Maehinea 

Power 

Wages on Auto Machines 
Process Sundries. Oil, etc. 
Floor burden, 5000 sq. It. at 5fS 
Supervision (general) 


$ 53 
53 
100 
75 
45 
250 
100 


00 
00 
00 
00 
00 
00 
00 


$ 53 

53 
62 
55 
25 
250 
100 


00 
00 
00 
00 
00 
00 
00 


By machine earnings 

(Being total amount distributed toJolMby means 
o7 machine rates) 

Undistributed balance 


$576 
100 


00 
00 


$292 
305 


53 
47 


Total debit 


$676 


00 


$598 


00 


$676 


00 


$598 


00 



Total hours, January, 4400; November, 2187 

Hourly burden on the average hourly plan: 

676 598 

'•"•:SS- '*'••'= Nov.— .27.3^ pThr. 



Supplementary Rate: 

100 . 

Jan. — t::^- 2.27 J6 per hr. 



4400 



141^ per hr 



Cost Statement of Job 








Jan. 


Nov. 


10 houis Mach. No. 9 at 4^ 
6 hours Maoh. No. 8 at 34^ 

12 hours Maeh. No. 17 at 15^ 
3 hours Maeh. No. 3 at 23i 


0.40 

2.04 

1.80 

.69 


4.93 

4.12 
.70 


4.93 


3 hours wages at M 
Supplementary rate, 31 hrs. at 2.27^ 


3.10 
.60 
.42 


4.12 

at I4<l, 4.34 


Total Works Cost 




$9.75 


$13.39 



" The works cost of this job has gone up ftom S9.75 to 
S13.39, although precisely the same machine time and the 
same amount of wages was expended in the one period as in 
the other." 

Now, what is the use of this ''works cost^' of S13.39? 
It gives no information as to what is the value at which the 
product should be inventoried if it remains unsold on Dec. 31. 
K we inventory it at S13.39 we have overvalued it at least 
S13.39-S9.75«S3.64, or 37.3 per cent, and have increased 
the apparent or book profits by that amount, and corre- 



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BOOKKEEPING AND COST ACCOUNTING 



spondingly decreased the book-profits of the next year, 
when the goods are sold. It gives no information as to what 
the probable cost of the product will be next year, or any 
basis for fixing selling prices. It does nothing except to 
enable the bookkeeper to balance his books in such a way as 
to charge the goods produced each month with the ^ole 
expense of the factory, mcluding the expense of idle time, in 
that month, and to cause the books to hide the fact that the 
factory lost money in November on account of the idle time. 

If the " normal burden " method of cost-keeping had been 
used, assuming that the machine-hour rates, total $4.93, are 
those of a normal year, then the works cost of the product 
would have been the same in both months, and the undis- 
tributed burden would at the end of the year be charged 
to Profit and Loss. 

Suppose a job is done on the last day of the month, which 
has a normal supplementary rate, and an exactly similar job 
is done on the first day of the next month, but on account 
of the slackness of business the supplementary rate in that 
month is extravagantly large. The cost of these two jobs 
will appear on the books as very different although their 
actual cost was the same. 

It is only fair to Mr. Church to say that in his recent book, 
" Manufacturing Costs and Accounts " (1917), he has prao- 
ticaUy abandoned the " supplementary rate." After giving 
a supposititious and exaggerated case of its application he 
says (p. 74): 

"In the case cited such apparent cost has no real value at all. 
It is so obviously fictitious that no one would be inclined to 
regard it seriously for a moment. What is the purpose in dis- 
tributing the wasted expense over orders in this way. First it is 
a concession to those accountants who desire to get rid of all 
shop expense onto product as they have been accustomed; ..." 

Postscript. — However, he does not seem to have altogether 
abandoned the supplementary rate, for he uses it in an exam- 
ple five pages later, and on page 353 he says: 

"If it takes S40 machine time to do a certain job to-day, when 
the shop is busy, it should not take any more machine time next 
month when the shop is slack. But if the machine should earn 
$80 in a month and thus be capable of doing two such jobs when 
the work is there for it to do, that is no reason for charging 
$80 as machine time in the slack season. It is much better if we 
express the cost of the job in the slack season in two parts thus: 
Machine time, $40; Supplementary rate, $40; Factory cost, $80. 
There are certain cases when it might be valuable to charge the 
cost of wasted manufacturing capacity to a special account and 
so, later, to Profit and Loss. By this means the true cost of 
doing the work would be known, the true profit on each order 
would also be known, and the loss due to unemployed capacity 
of the plant would be kept as a separate item. No clear and 
general rule can, therefore, be laid down as to whether the cost 
of wasted manufacturing capacity should be distributed over 
Orders by means of a supplementary rate or charged to a Waste 
Account and so to Profit and Loss. It does not follow in all 
cases that this waste is due to the conditions of trade. It is 
also sometimes due to poor management.'' 

It thus appears that Mr. Church is now " on the fence " 
as regards the supplementary rate, as he is on the question 
of including interest in cost. Regarding this he says (page 
394): " It is a matter of option whether it is included in 
costs: but if it is not, some of the advantages of advanced 



accounting are lost. Whether there are disadvantages that 
counterbalance its inclusion on this ground remains at present 
a matter of opinion." 

A Common Fallacy of the Old School of Accountants 

" There must be no evasion of the prime fact which underlies 
all true costing. All the expenditure of the firm; all wages of 
managers, foremen, draughtsmen and clerks, all materials and 
workmen's wages; and depreciation of plant and buildings 
(which, imder another form, is payment for their use); in short, 
all the expenditure which appears on the debit side of Trad- 
ing Acct. is cost of production and must, in some form or other 
appear in the Cost Accounts. The costings should be com- 
pleted to the close of each month, as longer periods would involve 
much complication, and it is essential for correct results that 
the eatablishmerU charges for any one month are distribided aver the 
direct wages for that month" — Burton. 

Suppose that a factory is building engines. The ooet of an 
engine is the sum of the labor and material costs of each of its 
parts, plus the cost of sjssembling and finishing it and putting 
it on cars, plus the proportion of the establishment charges 
that should be charged to the cost of the engine. The 
building of an engine may be done m parts of three months. 
The drawings and patterns are finished in the first month; 
the castings some in the fij*st month and some in the second, 
and the replacement of a defective casting in the third; the 
machine work in the second and third months; and the assem- 
bling, testmg and shipping all in the third month. Suppose 
that the establishment charges (salaries of managers, fore- 
men, clerks, draughtsmen, expenditures for light, heat and 
power, interest on investment, insurance, taxes, depreciation, 
etc.), are practically the same for each month, say $10,000 
per month, but that the wages differ widely in the three 
months, the first month only $5000 on account of stoppages 
due to strikes or accidents, the second $15,000, on account 
of running overtime, and the third $10,000, when shop con- 
ditions are normal. According to Mr. Burton " it is essen- 
tial for correct results that the establishment charges for any 
one month are distributed over the direct wages for that 
month.'' This was practically the universal opinion of the 
old school of accountants. By this method of dtstribution 
each $100 of wages charged to this engme in the first month 
would be saddled with $200 burden, in the second month with 
$66.67 and in the third month with $100. The cost of the 
engine arrived at in this way would be of use only to the 
bookkeeper — ^it would enable him to balance his cost accounts, 
but it would be of no use to the factory management or to 
the sales department. It could not be used properly for an 
inventory value nor as a basis for fixing the selling price of 
another engine of the same kind and size. 

** A False Theory. There are several well-known methods of 
charging burden to cost, each more or less justified by the various 
conditions in different lines of industry. These methods have 
one point in common, however, in that they contemplate charging 
aU of the burden against the product made, regardless of whether 
the plant is running at fuU or part capacity. The result is that 
during periods of forced production costs seem low, while during 
periods of curtailed production costs seem high, since all of the 
burden is distributed over a greater or lesser production. 

" At the extreme periods in the cycle between business depres- 
sion and prosperity this method of handling burden gives widely 



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81 



Huctuating costs and causes many of the present 83rstem8 of 
cost accounting to fail just when they are most needed. 

**Tlie Correct Theory. Contrary to the general practice 
stated above, the fact is that only a part of the total burden is 
chargeable to ths manufacturing cost of the frodtuA made during 
periods of curtailed production, the part chargeable being the same 
percentage of the total burden as the curtailed production is of the 
standard production. The burden not chargeable represents the 
ooBt of unused capacity for manufacturing, and is an expense to 
be deducted from profits. The cost of this unused capacity for 
manufacturing must be disposed of in some manner. 

" Consider a manufacturer who can either make his product 
entirely at his own plant or buy some of the parts. At a time 
when business is poor his cost records show that a certain parts 
costs 20 cents to manufacture whereas it could be purchased 
for 18 cents. The elements of the 20-cent cost are 4 cents for 
material, 8 cents for labor and 8 cents for burden. During a 
busy period the cost of the piece was 16 cents because the burden 
cfaargie was then 4 cents instead of 8 cents. 

*' Now if the manufacturer had found that he could buy the 
parts at a saving of 2 cents each when operating at full capacity 
he might well have done so. His costs would have then shown 
him an opportimity to save money. But if he is guided blindly 
by his costs in a dull period, and purchases the parts, he simply 
increases his losses. He will lose the least money by continuing 
to make the part at an apparent loss. In doing so he disregards 
his costs, lliey have failed. Reliable costs, comparable under 
all conditions, are not to be secured unless the burden charged 
to production is only that pertaining to the equipment that is 
actually at work."— Clinton H. ScovelL 

Mr. H. L. Gantt, in a paper on '' The Relation between 
Production and Costs," 1915 (Trans. A. S. M. E., vol 37), 
uses practically the same arguments as Mr. Scovell, and 
reaches the same conclusions. He says : 

'* Most of the cost S3rstems in use, and the theories on which 
they are based, have been devised by accountants for the benefit 
of financiers, whose aim has been to criticise the factory and 
to make it responsible for all the shortcomings of the business. 
In this they have succeeded admirably, largely because the 
methods used are not so devised as to enable the superintendent to 
present his side of the case. Our theory of cost keeping is that 
one of Us prime functions is to enable the superintendent to know 
whether or not he is doing the work he is responsible for as econonir 
icaUy as possibUf which function is ignored in the majority of 
cost systems now in general use. Many accountants, who znake 
an attempt to show it are so long in getting their figures in shape 
that they are practically worthless for the purpose intended, 
the possibility of using them having past. 

" The indirect expenses chargeable to the output of a factory should 
bear the same ratio to the indirect expense necessary to run the 
factory at normal capacity as the output in question bears to the 
normal output of the factory. 

" The view of costs so largely held, namely, that the product of a 
factory, however small, must bear the total expense, however large, 
is responsible for much of the confusion about costs and hence 
leads to unsound business policies. 

" The only expense logically chargeable to a product is that needed 
for its production when the factory is running at full or normal 
capacity. What I propose as the real cost of an article is not 
what it has apparently cost in the past, but what it should cost 
if the proper manufacturing methods were used and the shop 
were run at full capacity. This might be called the ideal cost, 
and toward its attainment all efforts should be directed." 

TBDB LAST WORD ON BURDENS-STANDARD BURDEN 
PER UNIT OF FINISHED PRODUCT 

Under scientific management efforts are made to obtain 
standards for every element in manufacturing, including 
quantity and quality of raw material, output of machines, 



efficiency of labor, and time and wages for each operation. 
By means of time, motion and fatigue studies the methods of 
doing the various operations are standardized, and by the 
task and bonus sj'stem of wage payments the labor cost of 
any operation may be predetermined within a narrow range 
of variation. The standardization of burden is a more dif- 
ficult problem, but it may be accomplished whenever the same 
articles of product are made continuously or frequently. 

Suppose that a certain product, which is regularly made in 
large quantities, year after year, consists of four groups 
assembled together, each group having an average of five 
pieces, and each piece requiring on an average five operations. 
In this case there would be a hundred operations on each 
finished article (in the case of a typewriter, a cash register or a 
calculating machine the number of operations might run into 
the thousands). In the ordinary accounting system, for a 
hundred operations on a given lot on one office order (whether 
the lot be a single article, as in the case of a large engine, or 
ten thousand articles as in the case of small articles like clocks 
or valves) at least a hundred separate job tickets would have 
to be written — more than a hundred if some of the operations 
on a given lot lasted more than a week and a new job ticket 
was issued each week that the job lasted, perhaps a thousand 
if a new job ticket was issued each day. Each of these 
tickets would contain a great mass of detailed information 
(see the job tickets on pages 59 and 60). They would 
include the workman's name and number, his time, usually 
stamped by a clock, his wage or piece rate, the bonus earned 
and the total wages, all of which would be necessary in order 
to make up the pay roll, and besides this, for cost and sta- 
tistical purposes, the office order number, the job number, the 
piece and the operation symbol, the machine number or 
symbol, the niunber of pieces operated on, and finally, if 
the machine-hour rate method of distributing burden is used, 
the burden figures corresponding to the machine hours and 
rate. Each one of these job tickets, under the old system, 
is posted, with all its variety of detail, onto piece cost cards 
or into a piece cost ledger, and when the pieces are assem- 
bled into groups and the groups into the finished product 
the assembling job tickets are further posted into cards or 
ledgers in order to obtain the total cost and the unit cost of 
the finished product. 

In one factory visited by the author there were thirty loose- 
leaf cost ledgers, each containing probably 2(XX) pages, 
making 60,000 cost pages in all. Each one of these pages 
would have to be examined by a clerk at least once in order 
to obtain the cost figures for use in inventory valuations of 
finished parts in stock and of finished products in the ware- 
house, and a statistician might examine them in order to 
obtain figures for his statistical reports and comparisons of 
costs at one period with those at another, but except for these 
purposes all these books and all the costly pen-and-ink work 
in them are of little or no value to any one. 

The machine-hour rate system of distributing burden is, 
undoubtedly, the best yet found for approximating the true 
cost of a manufactured product, and when the product con- 
sists of many pieces, each requiring numerous operations, 
it is necessary to obtain the burden for each operation, but 



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BOOKKEEPING AND COST ACCOUNTING 



having once determined the cost of a given lot, and having 
standardized the cost of raw material and of labor for 
each piece and for the assembled product, the total 
burden charges obtained by adding together aU the 
burden charges for the several operations may then be 
taken as the standard total burden for all similar lots, 
and, thereafter, there is no need of figuring the burden on 
each separate operation until there is a change in the method 
or in the speed of manufacturing, or until there is a change 
in the monthly charges against Burden Account, such as 
rent, insurance, taxes, superintendence, indirect labor, 
reserves for depreciation, etc. 

A vast amount of clerical work may thus be saved. This 
plan of using a standard burden per unit of finished product 
may make it possible to introduce an entirely satisfactory 
cost system into some large factories where the old method 
of figuring the burden separately on each job ticket would be 
so costly as to make it impracticable. 

When the standard task and bonus rates and the standard 
burden per unit of finished product have been established 



there is no need of writing a separate job ticket for each 
operation, or even for each piece or lot of sinular pieces. A 
weekly time ticket is issued to each workman, on one side 
of which is stamped the clock figures for " in " and " out," 
morning and afternoon, and on the other side is entered the 
count of pieces finished each day, or each operation, together 
with the piece and operation symbols and the ofl&ce order or 
lot number, which takes the place of the separate job ticket 
numbers in the old system. 

Example, Suppose a certain product, 106X, is made 
of two pieces, A and J5, and each piece has three machine 
operations. An experimental lot has been made, the best 
process of manufacture has been determined, time, motion 
and fatigue studies have been made for each operation, 
standard times, tasks and bonuses have been fixed, and the 
burden on each machine operation and on assembling, fin- 
ishing, testing and packing has been calculated on the ma- 
chine-hour rate basis. 

A standard schedule of operations is then made out as 
follows: 











Operation Scheoule 


: FOR 


106X 






















Operation 


Machine No. 


Time for 
100 pieces 


Wage per 
hour, baae 


Piece rate 


Bonus 


Labor cost 


i 

Burden 


Total 
labor and 


Piece 












No. 




hours 


cents 


per 100 


30 per cent 


per 100 


per ma- 
chine hour 


per 100 


burden per 
100 


A 


I 


87 


4 


^ I 




25 


1 


03 





32 


St 


40 





40 





72 


3 


12 




2 


T6 


2 






30 




61 




24 


1 


05 




30 




81 


1 


66 




3 


MIO 


6 






25 


1 


50 




45 


1 


95 




50 


4 


00 


4 


95 


B 


1 


P3 


5 






30 


1 


53 




46 


1 


99 




40 


3 


04 


4 


03 




2 


Dll 


1 






25 




48 




14 




62 




30 




57 


1 


19 




3 


T6 


3 






30 


1 


02 




31 


» 


33 




30 


1 


02 


2 


35 




23 




6 


42 


1 


92 


6 


34 


9 


l« 


17 


50 


Aaaemble 




Bench 


1 






40 


• 


— 









40 




15 





15 




55 


FiniBh 




Bench 









40 




— 




— 




20 




15 




06 




26 


Tert 




Bench 









40 




— 




— 




08 




15 




03 




II 


Pack 


[) artidefl 


Qench 


1 







40 












40 




15 




15 




55 




2 


7 


1 


08 




41 


1 


49 


Total, 10 


26 


' 


9 


« 


9 


57 


18 


99 



An office, or production, order may read as below: 
; Order No. 1761. Jan. 2, 1917. 
! Make 10,000 -106X, in 10 lots. 

1000 per month. 

The weekly time ticket of a man working on Macliine T6 
may show the following: 



(Reverse side of card). 



Time Ticket, Week Ending Jan. 14, 1917. 
Name, J. Jones. 



No. 67 



Order 


Article 


Piece 

and 

oper'n 


Mach. 


Start 


Finish 


Hours 


Pieces 


Finish 
or not 


1761 


106X-1 


A2 
B3 


T6 
T6 


V9 7A 
Vii 4P 


Vu4P 
Vi4 12 


26 

24 


1010 
700 


F 
NF 



Jan. 




In 


Ouc 


In 


Out 


Hours 


9 


M 










9 


10 


T 










9 


11 


W 










9 


12 


Th. 










9 


13 


F 










9 


14 


S 




12 


+ 




5 




50 



Cr. Labor 1010 at 1.05 per 100 
700 at 1.33 per 100 



10.60 
9.31 



19.91 



Chg. 106X-1 

When the time ticket is turned in at the end of the week 
the pay roll clerk credits Jones $19.91 and puts the card in a 
file of unfinished orders, in a folder marked 106X. When 
all the operations, including the packing, on the lot have 
been completed the cards are taken out of the folder, and the 
total labor costs are added on the adding machine and 



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DISTRIBUTION OF BURDEN 



83 



entered on a Finished Product Cost Card. The total amount 
of the material issued for the order, taken from the Stores 
Issue Cards, and a credit to the job for scrap unused niaterial 



or finished parts returned to stores, taken from Charge 
Stores, Credit Work in Process cards, are also entered on the 
Cost Card. The card may contain the following information : 











Finished Pbodcct 


Cost 


Card. 


Abticls 106X. 


Lot Obdbbbd 1000 












Date 
Finished 


Order 
and Lot 


Coat of 
Material 


Labor 
Standard 


Labor 
Actual 


Burden 


Finished 


Spoiled 


Credit 
Charge Store 


Charge 
Warehouse 


Cost 
per lUO 


Jan. 26 


I76I-I 


50 


00 


t 

i ^^ 


20 


96 


40 


95 


70 


995 


A. 15; B, 10 


! 2 


60 


240 


00 


24 


12 



When this entry has been made in the cost card, an entry 
is made on a memorandimi for Journal Entr}*^ as follows: 

Factobt Costs. Month of Januabt, 1917 





Chabgb 


1 

Credit 


Article 


store 


Work in 
Prooess 


Store 

1 


Labor 


Burden 


Total 


106 X-l 


2 


«0 


240. 


00 


50 


50 


96 


40 


95 


70 


242 


60 



And at the end of the month the several columns in this 
memorandum are posted and the totals entered in the Journal- 
Ledger. The total credits to labor should equal the total of 
the direct labor pay roll, .and the total credits to stores should 
equal the total of the Stores Issue tickets for material issued 
for work in process. 

If the lot is not completed by the end of the month and it 
is desired to balance the factory accounts monthly a modifi- 
cation of the method is made. A memorandum of the weekly 
charges and credits to lot 106X-1 is made as below: 

Weekly Direct Labor Charges. 
Order 1761— Article I06X. Lot I. 



1917 January 7 
14 
21 
28 
31 



7.25 
24.60 
14.30 
21.40 

5.15 

72.70 



Material issued, per stores tickets 
Scrap returned, charge stores 
Not finished 

Standard Labor Cost, if finished 
Estimated Labor Cost to finish 
Estimated burden for work done 



48.50 
1.80 

94.20 
21.50 



72.70 
94.20' 



-of 95.70-69.57. 



The entry in the memorandum for Journal Entry then will 



be 







Charge 

i 


Credit 




Store 


1 
Work in 
Prooess 

1 


Store 

1 


Labor 


Burden 


106 X- 


(N.F.) 


1 


80 


188 


97 




48 


50 


! n 

i 


70 


69 


57 



The next month the weekly memorandum may show: 

Completion of I06X, lot I. 

Feb. 3. Labor. 23.70 

Material issued 2 . 00 

Scrap returned . 80 



and the Journal Entry Memorandum for February: 








Charge 


Credit 




Store 


1 
Work in 
Process 


Store 


Labor 


Burden 


106 X-l (F) 





80 


' 5, 


03 


2 


«. 


23 


70 


26 


13 



The burden charge being the difference between the 
standard burden, S95.70 for 1000 articles, and the $69.57 
charged in January. 

This method of calculating the burden for the two months 
separately (in proportion to the direct labor oget in each 
month) is, of course, inaccurate, for the work done in the 
first month probably included most of the work on the large 
machines carrying an hourly burden rate of 40 and 50 cents 
while the work in the second month was largely bench work 
with a burden charge of only 15 cents per hour. A more 
accurate method of apportioning the burden for the two 
months would be to take from the time tickets the machine 
hours of the work done and from the standard schedule the 
machine rates, but this would involve an amount of clerical 
labor that would probably not be worth its cost. The error 
made by the shorter method of estimating the burden of the 
first month, whatever it may be, is corrected in the second 
month by charging the difference between the standard 
burden for the whole month and the amount already charged 
in the first month. 

The object of cost accounting is to arrive at the factory 
cost of the product when it is completed and delivered to the 
warehouse, and not to make a monthly balancing of the 
accounts. An overcharge or undercharge of burden on the 
separate portions of a given lot finished or partly finished in 
two or three different months is of no serious importance 
when it is considered that the machine-hour rate, while the 
nearest approximation ' to an accurate burden-charging 
method is still but an approximation. 

Moreover the " factory cost " which is most important 
is not always the actual expenditure incurred by the factory 
in making a given portion of its product, but the figure at 
which the product should be charged in the warehouse inven- 



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84 



BOOKKEEPING AND COST ACCOUNTING 



tory and charged to the sales department; not what the 
product cost to make in the past under possibly unfavorable 
conditions, but what it should cost at the present time or in 
the near future under normal conditions, in other words 
the probable cost of reproduction. It is the figure to be used 
in computing the factorj*^ profit and loss at the end of the year 
or other fiscal period, and the figure to be used as a basis for 
establishing the minimu^ifi selling price. " Warehouse value " 
might be a better name for it. 

Interpretatioii of the Recorded Cost Figures. Recapit- 
ulating the figures from the above example we have the fol- 
lowing: 





Material 


1 

Direct 
Labor 


Bxirden 


Spoiled 


Charge 
Stores 


Warehouse 
Value 


Cost 
per 100 


Standard. 1000... 

Actual, 995 

Standard for 995 


50 
50 
49 


00 
50 
75 


94 
96 
93 


20 
40 
73 


95 
95 
95 


70 
70 
22 


1 






239 
240 
238 


90 
00 
70 


23 
24 
23 


99 


A, 15; B. 10 


2 


60 


12 
99 












P!xGeflfl of actu&I 





75 


2 


" 




1 


48 




-2 


60 


1 


30 





13 











It is not to be expected that the actual material and labor 
costs will ever be exactly equal to those of the standard 
schedule. Machines will break down; belts will slip; mate- 
rial will be harder or easier to machine; men will some- 
times fail to earn their bonus, or may earn extra wages 
for overtime; more material will prove defective or will be 
spoiled in one lot than in another; the spoiling may take 
place in the first operation or in the last; men may some- 
times be penalized for spoiling material and sometimes not, 
the factory in the latter case assuming the spoilage as one of 
the normal risks of the business. In the imaginary case 
above described, for the lot of 1000 articles 1010 pieces each 
of A and B were furnished by the stores, of these 15 of A 
and 10 of jB were spoiled in process so that only 995 articles 
could be completed, 5 pieces of B being left over and put in 
stores for the next lot. 

In the above case we have charged the warehouse with 
$240 for 995 pieces. Sticklers for absolute accuracy may 
find fault with these figures, one set holding that the charge is 
too low, for we have charged the standard burden $95.70 
for 1000 articles, when 1010 pieces each of A and B were 
worked upon, and the direct labor cost was $2.20 more 
than the standard and, therefore, the burden should be 
greater, more machine hours than the standard having 
been employed on the lot; while another set would say 
that we have inflated the inventory by charging the 
standard burden for 1000 articles when only 995 were 
made, and, that we have also inflated it by charging to 
warehouse the cost of spoiled work, which should have been 
charged to a separate account and not to the cost of the 
product. 

These are matters of refinement of detail which each 
factory should settle for itself in its " accountants* code." 
It may be well for the code to specify that the machine- 
hour burden shall include an allowance of say 2 per cent for a 
normal amount of spoiled or defective work and that when 



the actual spoilage or defective material is less than this 
amount no account need be taken of it in figuring costs, but 
that when it is in excess of this amount, as it often is in 
engine building, when a cylinder is spoiled in boring by a 
shop accident or on account of a flaw in the casting, the loss 
due to spoilage shall be taken account of as one of the occa- 
sional risks of the business, charged to spoiled work account, 
closed at the end of the fiscal period into Profit and Loss, and 
not be included in the inventory valuation of the product. 

We must be careful not to inflate our inventory and, 
therefore, exaggerate our book profits, and possibly also to in- 
crease our selling prices to such an extent as to decrease our 

sales, and on the other hand 
not to underestimate our costs, 
which may lead to making sell- 
ing prices too low, thereby less- 
ening profits. The middle 
course seems to be the safest, 
and this may be had by speci- 
fying in the accounting code 
that the machine-hour rates 
include an allowance of 2 per 
cent (or other moderate figure) for spoiled work, and that the 
standard burden to be charged to a lot is that belonging to 
the number of articles ordered and expected to be made (lOOO 
in the case described) although work is done on a few extra 
castings ordered with the expectation of some loss from 
spoilage (10 extra castings in this case) and although less 
than the expected number of articles (995 in this case) are 
actually finished. One advantage of this method is that it 
minimizes the clerical abor. 

Advantage of the Standard Schedule. The saving of 
labor in accounting due to the adoption of the standard bur- 
den per unit of product has been sufficiently discussed above, 
but a more important advantage of the standard schedule 
is that it leads to obtaining prompt information in regard to 
the progress of work through the factory and, in regard to 
excessive cost of any operation. With the standard opera- 
tion schedule on his desk for each kind of product that is 
going through the shop, the superintendent or production 
clerk can compare the daily count of pieces made in each 
operation with the standard, instantly note any serious 
variation from the schedule and promptly investigate the 
cause and apply the remedy. 

Charge Unabsorbed Overhead to the Sales 
Department 

I recently had a discussion with a public accountant in New 
York who claimed that overhead should only be charged to costs 
on the basis of normal production, and that when orders were 
insufficient to allow of normal production the unabsorbed expense 
should be charged to the Sales department, because they didn't get 
the orders. Some works managers and superintendents would 
very much appreciate such relief. For the purpose of intelligent 
comparison of costs some such arrangement should work satis- 
factorily, although probably in the steel business the excess should 
be charged through some special account against the income 
rather than to the Sales department.— Gershom Smith, Eng, 
Mag.f June, 1909. 



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CHAPTER IX 
DEPRECIATION. INVENTORY VALUATION. APPRAISALS 



Method of Treating Repairs and Depreciation in the 
Accounts. Suppose a shop is fitted with new machinery 
valued at $60,000. It is estimated that the possible depre- 
ciation due to obsolescence will require contributions to 
an insurance fund at the rate of 4 per cent per year, or 
$2400 per year, or $200 per month; that the depre- 
ciation due to wear and tear, not made up by current 
repairs, but deteriorating the usefulness of the machinery 
so that it will have to be replaced at an average time of 25 
years, is also 4 per cent, or $200 per month, that minor 
repairs, such as renewal of bushings, replacing small gears 
and the like wiQ average 2 per cent, or $100 per month. 
Suppose also that extraordinary repairs, due to accidents 
and costing from $103 to $2000 each, are apt to happen at 
irregular intervals, the total cost in different years ranging 
from $300 to $3000. It is desired to distribute and absorb 
these depreciations and repairs into the monthly records of 
costs of the several clajsses of product or of costs of work in 
the several departments. If the normal output of a certain 
department or of a certain class of goods is 5000 pieces per 
month, costing $5000, or $1 each, and in one month there is a 
breakdown costing $1000 increase in the repair account above 
the usual cost, and cutting the monthly product down to 2500 
pieces, the apparent cost of these pieces, if the cost of the 
extraordinary repair is $1000 and it is all charged against the 
product of that month, may be raised to $1.50 each or up- 
wards. It is evident that a cost so obtained is of no use to 
the management for any purpose. It is not a basis for the 
valuation of goods in the warehoase or for fixing the minimum 
price at wliich goods may be sold 



Example 




^ -> 




Ist Month 


2d Month 
Wrong 
Method 


2d Month 

Bight 
Method 


Material 

Direct labor 

Indirect labor and all normal ezpenaes, 

repairs, depreciation, etc. 
Extraordinary repairs 


$1000 
2000 

2000 
none 


$ 500 

1000 

1500 
1000 


$ 500 

1000 

1000 


Total coflt 

Apparent Coat per piece 


5000 

5000 

$1.00 


4000 

2500 

$1.60 


2500 

2500 

$1.00 



The warehouse in the second month should be charged only 
tlxXiO or $1 each, the normal cost of the 2500 pieces made 



and the difference between the total and the normal cost 
($4000 -$2500 =$1500) should either be charged to Profit 
and Loss and at the end of the year, with other profits and 
losses, be balanced into surplus or capital or " Company " 
account, or else be charged against a Reserve for Repairs 
account, which is accumulated for the purpose of taking care 
of such extraordinary repairs. 

Current small repairs may be charged directly to a Repair 
Account which may be closed monthly into Manufacturing 
Acct. and distributed in the cost records of departments or 
classes of product. Manufacturing Acct. should also be 
charged monthly with one-twelfth of the average estimated 
yearly cost of depreciation. Reserve for Depreciation bemg 
credited, and with one-twelfth of the estimated average 
yearly cost for extraordinary repairs. Reserve for Ex. Repairs 
being credited. As actual expenditures of cash, labor or 
material are made for replacement of machines that have 
become obsolete or worn out, or for extraordinary repairs, 
these Reserve Accounts are charged and Cash, Labor, Mate- 
rial, or Mfg. Acct. credited. The balance of the Reserve 
accounts at the end of the year, if on the credit side, repre- 
sents a fund which has accumulated and may be drawn upon 
for replacements and extraordinary repairs in the following 
years; if on the debit side, the balance represents the excess 
of actual expenditure for replacement and repairs above the 
total of the monthly credits to these accounts. This debit 
balance may be carried over into the next year and may 
gradually be wiped out by the monthly credits, or it may be 
transferred to Profit and Loss, as may seem best to the man- 
agement. 

The credit balance of the Reser\'e Accounts may be trans- 
ferred to the credit of Equipment Acct. to reduce the inven- 
tory value of the equipment, or it may be carried forward and 
dealt with at some future time. Thus, if at the end of a few 
years after the opening of the books the Dr. balance of 
Equipment Acct. is $60,000 and the Cr. balance of the 
Reserve Accts. is $20,000, this may mean either that the 
equipment is worth only $40,000, having depreciated $20,000 
in value, or that its present value to the Company as a 
" going concern " is the full $60,000, but that there is a 
$20,000 fund held in reserve against its possible rapid depre- 
ciation at some time in the near future. In any event the 
meaning of the $20,000 reserve should be clearly explained 
on the Ledger for the information of an auditor or examiner. 
If it should appear to the management that this $20,000 fund 
is greater than the real depreciation plus a reasonable reserve 



85 



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BOOKKEEPING AND COST ACCOUNTING 



for the future, then part of it may be credited to Profit and 
Loss or Surplus Account, and then to Dividend Acct., paying 
it back to the stockholders, but this is a matter that is for the 
Directors and not the Accountant to decide. 

In making estimates of costs the amount to be. added for 
depreciation of machinery, if figured as a percentage of the 
value of the machinery, should be based on its original value 
and not on a depreciated value. For example, if the machin- 
ery when new was worth $60,000 and 5 per cent per annum 
or $3000 is deducted from its inventory value for depreciation, 
this amount being charged as one of the items of cost of the 
annual product, the same amount should be charged to costs 
each year, although the inventory value may have been 
reduced to $40,000 or less. This annual charge does not in 
fact represent the actual depreciation each year; what it 
does represent is an annual contribution to a fund which is 
to be used eventually for such repairs, renewals and replace- 
ments as will bring back the value of the machinery to its 
original amount. 

DepreciatioiL From notes on Business Engineering, by 
Alex. C. Humphreys. 

Definition, Reduction in worth caused by wear and tear 
through use, and by obsolescence and inadequacy. 

Repairs, renewals and replacements are things done to repair 
or compensate for the losses occasioned by depreciation. 

Estimating in advance of the facte the probable and possible 
future depreciation to be included as one of the annual items of 
operating cost is a different proposition from determining the 
actual depreciation which is found in the appraisal of a plant in 
operation. The first is known as theoretical, the second as 
actual depreciation. 

Repairs and replacements of certain minor parts of the plants 
are paid for out of current income and should be charged as part 
of the expenses of the year unless they are covered by an inclusive 
yearly charge to cover all repairs, renewals and replacements. 

Replacements of parts greater in value may be charged as part 
of the expenses of the year, or their cost may be distributed 
over a number of years, or they may be included in an inclusive 
yearly charge above mentioned. 

The theoretical depreciation due to obsolescence, inadequacy, 
or such decay as will in time necessitate renewal, is one of the 
cost or expense items that must be treated as an accruing liability. 
The first step is to estimate as closely as we can the annual loss 
occasioned by this depreciation. To estimate the probable 
life of each part of the plant it is necessary to consider the class 
and character of the plant, its design and construction; its 
capacity; the way in which it is operated; the present volume of 
business and prospects of the future; whether it is overworked 
or not; whether it is kept in good repair; and whether the cost 
of repairs is charged year by year against the profits. 

To assume that certain kinds of apparatus and machines can 
each be given definite life-expectations without regard to the 
special conditions involved is quite indefensible. What is the 
life of a boiler? What is the life of an engine? Such general 
questions cannot be answered. No general rules can be estab- 
lished either for future depreciation or for making estimates of 
actual depreciation as an element to be considered in the appraisal 
of present value of plant. 

Having examined each part of the plant and having developed a 
table of life expectations, it should be assumed for the purpose of 
this estimate that at the end of each life period covered by the 
table the parts of plant will have to be renewed. Many things 
may happen to change the estimate. As we should be careful 
to make the life estimates on the safe side we may hope for longer 
lives than those assumed. If as to any part we have under- 



estimated the element of inadequacy and we find the plant 
wholly or in part inadequate as to capacity before the expiration 
of the assumed life, we, at least, have the unexpected higher rate 
of increase in sales to compensate for the necessity of renewing 
the plant in advance of our estimate. It may be in such a case 
that the investment of additional capital will be found to be 
fully warranted. 

The problem of estimating accruing depreciation is a most 
difficult one to solve, even by the man who, by training and 
experience, is an expert. We should be prepared to amend our 
estimate from year to year as we have the opportunities to check 
up the correctness of the assumptions upon which we have 
based our estimate. All the details of depreciation estimates 
should be recorded fully and exactly so that as conditions change 
we, or those who follow wr, may always be able to compare the 
results of the estimates with the facts as found. With every 
record, especially in accounting, the statements should be com- 
pletely self-explanatory. 

Depredation and its Relations to General Expense. 
H. M. Norris, Eng. Mag. XVI (1898), p. 812. Mr. Norris sent 
a list of questions to several manufacturers of machine tools 
asking such questions as '' How would you figure depreciation?" 
"How do you regard small loose tools, as drills, reamers, etc.? " 
"Into how many items do you divide General Expense, and 
what are they.^' The answers showed wide difference of opin- 
ions on all the questions; for example, one n:anufacturer said 
he carried drawings, wood and iron patterns, jigs and fixtures 
on his books at cost, while another charged them to expense and 
took no further account of them. Mr. Norris says of these 
things: 

Drawings are not merchandise, they are merely means to an 
end, a necessary evil in production. Standard drawings are 
chargeable to capital, not as assets from which a given per- 
centage can be ^Titten off annually, but as assets whose real 
value can only be approximated. Only those drawings which 
are in use should be valued in the assets. Patterns when seldom 
used have little value. Patterns should be broken up as fire- 
wood as soon as they are no longer needed. Metal patterns in ' 
regular use remain of fixed value, repairs being charged to general 
expenses. 

Two of the replies were as follows: " We do not feel like 
going into all the details of our private business in the way 
you have suggested." " We feel that this is in a measure 
private information that we do not care to have disseminated 
generally." Mr. Norris thus comments on these replies: 
" A nation's progress is dependent upon the distribution of 
knowledge, and knowledge withheld is progress retarded. 
This is equally true of private enterprises, and I think it will 
be admitted that one of the chief essentials of progress, espe- 
cially in the mechanic arts is unselfishness — a willingness to 
exchange ideas, a broad and liberal policy fostered by an 
esprit de corps which insures its own reward." 

Four Methods of Calcolating Depredation.* If depreciation 
is calculated on too restricted a basis it may easily be found 
that money has been paid away in profits which ought to have 
been retained for the futiure. There are still divergent ideas as 
to the way in which it should be charged, quite apart from the 
percentage. The method matters little so long as enough is 
set aside. 

There are four recognized methods of charging depreciation. 
1. The reduced balance method; 2. The straight-line method; 
3. The annuity method; 4. The sinking-fund method. 

*Ck)ndensed from an editorial in Engineering (London) Jan. 19, 
1917, reviewing a paper read before the Institution of Civil Engi- 
neers, by F. Gill and W. W. Cook. 



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. DEPRECIATION. INVENTORY VALUATION. APPRAISALS 



87 



Taking a hypothetical machine, costing $1000 (£100 in the 
original article) with a physical life of 25 years and a scrap value 
of $20, and an economical Ufe of 19 years with a scrap value of 
$130, assume that the SIOOO will provide $50 annually for the 
shareholders and that enough should be written off to provide 
$870 at the end of 19 years. 

(1) Reduced balance method. 



Depreciatioii of $io,ooo in Twenty Years by Three 
Methods 



Iq successive years 

The capital value becomes 

The depreciation fund becomes 






1 


2 


3 


1000 


898.2 


806.7 


724.6 





101. 8 


193.3 


275.4 



19 
130 
870 



The value of the machine falls very rapidly at first and ver>' 
slowly toward the end, $21.90 the last year. This does not 
agree with the facts. A machine properly cared for suffers no 
damage the first three or four years. 

(2) In the straight-line * method $50 is required annually for 
interest and $45.80 for the depreciation fund, the latter totaling 
$<S79.20 in 19 years without interest. The $45.80 is invested 
either in a special fund or in the business. The interest of the 
fund, however, goes into the general account and the dividend is 
swelled by this interest. In the last year the interest on the fund 
amounts to $41.20. If the interest be added to the deprecia- 
tion fund year by year then a depreciation of $28.50 per year 
would be sufficient to furnish $870 in 19 years. In the case of a 
plant like a telephone pole (which carries its wires with uniform 
eflSciency until it is blown down or condemned by the Inspector), 
it is clear that the dividends are, by the straight-line method, 
being reduced in the early years and augmented in the later 
years, while the profits are uniform. Clearly this is not good 
i)ookkeeping. 

(3) The annuity method. Each year a part of the capital is 
repaid and a return is paid on the capital outstanding. The 
total charge is imiform at $78.50 for interest and depreciation 
and is made up of a decreasing return component and an increas- 
ing depreciation componenft. In 19 years the amount available 
for depreciation rises from $28.50 to $68.60. The capital value 
is written down each year by the amount of the depreciation and 
consequently the amount required for interest grows less and less. 
At the same time the interest earned by the depreciation fund is 
paid into the general account, so that the shareholder still gets 
his $50 yearly partly by earnings from the depreciated machine 
and partly from the fimd. By this plan the plant is written 
down slowly at first and more quickly toward the last, which 
certainly corresponds with the condition of moving machinery. 

(4) The sinking-fund method. The total annual charge is 
$78.50, made up of uniform charges each year, both for interest 
and depreciation The interest earned by the fund is added to 
it annually, while the value of the plant is not written down, but 
is credited with earning 5 per cent all the period. This is exactly 
the case of the telephone pole. The amount set aside in methods 
3 and 4 is identical and the result is identical at the end of 19 
years. The difference is that in one case the value of the plant is 
supposed to decrease annually and in the other it remains con- 
stant. The difference is one of bookkeeping mainly: 

The manufacturer who adopts method (1) and accumulates 
money fast in the early years is in the safer position, while the 
one following the straight-line method (2) is not dependent on the 
interest of the fimd to square his accounts. A big reserve fund 
is a most useful asset, but like many other desirable things it is 
difficult of attainment, especially by limited companies, whose 
shareholders generally think more of present dividends than of 
future safety. 

* This refers to a downwardly inclined straight line on a 
plotted diagram representing the uniform annual reduction in 
value. In other 'methods the reduction of value is shown by a 
curve. 





Straight Line Dbpbbciatxon 
AT 5% 


DBPBECIATION AT 10% ON 

Diminished Values 


Year 


Total 
Depreciation 


Remaining 
Value 


Total 
Depreciation 


Remaining 
Value 


1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

II 

12 

13 

14 

15 

16 

17 

18 

19 

20 


$500 
1000 
1500 
2000 
2500 
3000 
3500 
4000 
4500 
5000 
5500 
6000 
6500 
7000 
7500 
8000 
8500 
9000 
9500 
10000 


$9500 
9000 
8500 
8000 
7500 
7000 
6500 
6000 
5500 
5000 
4500 
4000 
3500 
3000 
2500 
2000 
1500 
1000 
500 



$1000.00 
1900.00 
2810.00 
3439.00 
4095.10 
4685.59 
5217.03 
5695.33 
6125.80 
6513.21 
6861.89 
7175.70 
7458.14 
7712.33 
7941.09 
8146.98 
8332.28 
8499.06 
8649.15 
8784.23 


$9000.00 
8100.00 
7290.00 
6561.00 
5904.90 
5314.41 
4782.97 
4304.67 
3874.20 
3486.79 
3138.11 
2824.30 
2541.86 
2287.67 
2058.91 
1853.02 
1667.72 
1500.94 
1350.85 
1215.77 



Sinking Fund Method 
Annual Payments of $302.43 for 20 Years. 5% Compound Interest ^ 



End of 


Principal 


Yearly 


Accumulated 


Total of 


Remaining 


Year 




Interest 


Interest 


Fund 


Value 


1 


$302.43 








$302.43 


$9697.57 


2 


604.86 


15.12 


15.12 


619.98 


9380.02 


3 


907.29 


31.00 


46.12 


953.41 


9046.59 


4 


1209.72 


47.67 


93.79 


1403.51 


8696.49 


5 


1512.15 


65.18 


158.97 


1671.12 


8328.88 


6 


1814.58 


83.56 


242.53 


2057.11 


7942.89 


7 


2117.01 


102.85 


345.38 


2462.39 


7537.61 


8 


2419.44 


123.12 


468.50 


2887.94 


7112.06 


9 


2721.87 


144.40 


612.90 


3334.77 


6665.23 


10 


3024.30 


166.74 


779.64 


3803.94 


6196.06 


11 


3326.73 


190.20 


969.84 


4296.57 


5803.43 


12 


3629.16 


214.83 


1184.67 


4813.83 


5186.17 


13 


3931.59 


240.69 


1425.36 


5356.95 


4643.05 


14 


4234.02 


267.85 


1693.21 


5927.23 


4072.77 


15 


4536.45 


296.36 


1989.57 


6526.02 


3473.98 


16 


4838.88 


326.30 


2315.87 


7154.75 


2845.25 


17 


5141.31 


357.74 


2673.61 


7814.92 


2185.08 


18 


5443.74 


390.75 


3064.36 


8508. 10 


1491.90 


19 


5746.17 


425.40 


3489.76 


9235.93 


764.07 


20 


6048.60 


461.80 


3951.56 


10000.16 







$3951.96 





* The formula by which the annual payment is found ib P - 



(1+i)»-l 

in which t "interest rate expressed as a decimal =.05, n —number of years, 
PsB payment niiade at the end of each year. The amount of the annual 
payment may also be found in annuity tables. See the " Mechanical Engi- 
neer's Pocket-book," page 16. 

Valuatioii of Machinery. ** If the machines are appro- 
priate for their purpose," says Mr. Matheson, " then their 
value will be arrived at by adding to their original cost the 
expense of installation, and deducting an amount for depre- 
ciation proportioned to their age and wear, and a further 
amount for any actual repairs they may require." 



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BOOKKEEPING AND COST ACCOUNTING 



Mr. Matheson says: 

Where the production is stimulated by a system of piece-work, 
the deterioration of the plant is likely to be more rapid than in a 
factory where the workmen are paid according to time only. 
In very busy times, when there is a pressing demand for the 
products, and profits are large, it may be expedient and remuner- 
ative to work long hours, and to force the plant and machinery 
to their utmost power, even at the hsk of a breakdown, so as to 
take full advantage of the transient high prices; but in such a 
case a corresponding rate would have to be written off for depre- 
ciation. 

Mr. Oberlm Smith, President of the Ferracute Machine 
Co., Bridgeton, N. J., says:* 

The grand principle which lies at the root of correct valuation, 
and which should govern the appraiser throughout all his work, 
is that any article is worth, not what it did costy hut what it would 
coat to re-place it to-day, providing it is so useful that it would 
be desirable to so replace it, were it destroyed. Thus, if a shop 
has a lot of machine tools which are built so near to the best 
modem practice that it would be desirable to duplicate them 
were they destroyed, they are worth exactly what said dupli- 
cates would now cost, delivered and set up in the shop, less the 
depreciation due to the wear and tear. 

The depreciation of special tools for wear and tear need be 
but very little, as, if they serve their purpose at all, they must be 
kept in such repair as to serve it perfectly. 

In practical dealings with this question, it seems to me that 
the best course is to give all special tools an inventory rating at 
their apparent value, and then to lay aside a portion of the extra 
profits which these tools have earned by their special usefulness, 
in the general reserve fund, or " Surplus," of the concern. They 
may thus be drawn upon, should any too sudden collapse in 
values take place. 



In a recent paper (Jour, A,S,M.E,, Jan., 1917), Mr. 
Smith said: 

Some people depreciated a set of machine tools 10 per cent 
each year and that soon made them worth one-half or one-quarter 
of their original value, when they were as good as ever. His 
rule had been to allow a small amount for depreciation each 
year and keep the tools in good order. If a tool was run down 
and needed repairs, or an additional part was applied to it and 
perhaps 50 per cent of the original value spent on it, then it 
was worth more at the end of the year when repaired and it 
was not right to keep depreciating it right along. It was worth 
as much as when new. 

In 1916 the author saw in operation in a factory in Phil- 
adelphia a heavy punching press that had been bought from 
Mr. Smith's company in 1872. It had been running regularly 
for 44 years, always on the same kind of work, and was to all 
appearances as good as new. It, no doubt, had some repairs 
made on it from time to time, such as re-bushing or rebab- 
bitting of its shaft bearings, and replacing some worn-out 
slides and gear wheels. A sinking fund reserve with an annual 
payment of 1 per cent of the original cost would probably 
have covered all of the repairs and depreciation. 

The amount of interest and amortization to be charged in 
any well-equipped power plant is greatly a matter of financial 
policy and not so much a question of the actual life of the plant. 
In our age of technical and industrial progress, plants lose their 
usefulness through obsolescence rather than actual deterioration, 
and the management with foresight favors high amortization 
charges, i.e., short Ufe, to provide a sinking fund for the replace- 
ment of obsolete with new and efficient machinery. — H. Haas, 
BuU. Am. Inst, Mining Engrs., May, 1917, p. 867. 







The Effects of Depreciation at Different Rates for Terms of Years ^ 






Years 


1% 


2% 


3% 


4% 


5% 


6% 


7% 


8% 


10% 


12% 


«5% 


20% 


1 


.990.000 


.980,000 


.970,000 


.960,000 


.950,000 


.940.000 


.930.000 


.920.000 


.900,000 


.880.000 


.850.000 


.800.000 


2 


.980,100 


.960,400 


.940.900 


,921,600 


.902,500 


.883.600 


.864.900 


.846.400 


.810.000 


. 774,400 


.722,500. 


.640.000 


3 


.970,299 


.941,192 


.912.673 


.884.736 


.857,375 


.830.584 


.804,357 


.778.688 


. 729.000 


.681,472 


.614,125 


.512.000 


4 


.960.5% 


.922,368 


.885.292 


.849.346 


.814,506 


.780.749 


.748,052 


.716.392 


.656.100 


.599.695 


.522.006 


.409.600 


5 


.950.990 


.903,921 


.858.734 


.815.372 


.773,781 


.733,904 


.695.688 


.659.081 


.590,490 


.527,731 


.443,705 


.327.660 


6 


.941,480 


.885,843 


.832.972 


.782,757 


.735,092 


.689.870 


.646.990 


.606.355 


.531,441 


.464,404 


,377.149 


.262,144 


7 


.932.065 


.868,126 


.807,982 


.751,477 


.698,337 


.648.478 


.601.700 


.557.846 


.478,297 


.408.675 


.320,577 


.209.715 


8 


.922,745 


.850.763 


.783.743 


.721,389 


.663,420 


.609.569 


.559,581 


.513.218 


.430.467 


.359.634 


.272.490 


. 167,772 


9 


.913.517 


.833,748 


.760.231 


.692,534 


.630.249 


.572,995 


.520,411 


.472.161 


.387.420 


.316.478 


.231.617 


.134,218 


10 


.904,382 


.817,073 


.737.424 


.664.832 


.598.737 


.538.616 


.483.982 


.434.388 


.348,678 


.278,500 


. 196.874 


. 107,374 


11 


.895.338 


.800,732 


.715,301 


.638,239 


.568.800 


.506,299 


.450.103 


.399.637 


.313,811 


.245,080 


. 167.343 


.085,899 


12 


.886.385 


.784,717 


.693,842 


.612,709 


.540,360 


.475.921 


.418.5% 


.367.666 


.282,429 


.215.671 


. 142.242 


.068.720 


13 


.877,521 


.769,023 


.673,026 


.588.201 


.513,342 


.447,366 


.389,294 


.338.253 


.254,186 


.189.790 


.120,905 


.054,976 


14 


868,746 


.753,643 


.652,836 


.564,673 


.487,675 


.420,524 


.362.043 


.311.192 


.228.768 


.167.015 


. 102,770 


.043.981 


15 


.860,058 


.738,570 


.633.250 


.542,086 


.463,291 


.395,292 


.336,700 


.286,297 


.205,891 


. 146.973 


.087.354 


.035,184 


16 


.851,458 


.723.798 


.614,253 


.520,402 


.440.127 


.371,575 


.313,131 


.263.393 


. 185,302 


.129.336 


.074,251 


.028,148 


17 


.842,943 


.709,323 


.595.825 


.499,586 


.418.121 


.349,281 


.291.212 


.242,322 


.166,772 


.113.816 


.063,113 


.022,518 


16 


.834.514 


.695.136 


.577,950 


.479,603 


.397.214 


.328,324 


.270,827 


.222.936 


.150,095 


.100.158 


.053,646 


.018,014 


19 


.826,169 


.681,233 


.560.612 


.460.419 


.377,354 


.308,624 


.251,869 


.205.101 


. 135.085 


.088.139 


.045,599 


.014,412 


20 


.817,907 


.667,609 


.543.794 


.442,002 


.358,486 


.290.107 


.234,238 


. 188,693 


.121,577 


.077,562 


.038,760 


.011.529 


21 


.809.728 


.654,257 


.527.480 


.424,322 


.340,562 


.272,701 


.217,842 


.173,597 


.109,419 


.068.255 


.032.946 


.C09.223 


22 


.801,631 


.641.171 


.511.655 


.407,349 


.323,533 


.256,338 


.201,593 


.159,709 


.098.477 


.060.064 


.028,004 


.007.379 


23 


.793.615 


.628.348 


.4%.306 


.391.055 


.307,357 


.240.958 


.188,411 


. 146,933 


.088.629 


.052,856 


.023.803 


005,903 


24 


. 785,679 


.615,791 


.481,416 


.375.413 


.291,989 


.226.501 


.175,222 


.135,178 


.079,766 


.046,513 


.020,233 


.004,722 


25 


.777.822 


.603.466 


.466,974 


.360,3% 


.277,390 


.212.911 


. 162,957 


.124.364 


.071,790 


.040,931 


.017,198 


.003.778 


26 


.770,044 


.591,3% 


.452,%5 


.345.980 


.263,520 


.200.136 


.151,550 


.114.415 


.064.611 


.036,019 


.014.618 


.003.022 


27 


.762,343 


.579.568 


.439,376 


.332,141 


.250.344 


.188,128 


.140,941 


. 105,261 


.058.150 


.031,697 


.012,425 


.002.418 


28 


.754,720 


.567,977 


.426.194 


.318.855 


.237,827 


.176,840 


.131.075 


.0%,840 


.052.335 


.027,893 


.010,562 


.001.934 


29 


.747,173 


.556.618 


.413,408 


.306.101 


.225,935 


. 166,230 


.121.900 


.089,093 


.047.101 


.024,546 


.008,977 


.001,547 


30 


.739,701 


.545,485 


.401,006 


.293.857 


.214.639 


.156.256 


.113.367 


.081,966 


.042,391 


.021,601 


.007,631 


.001,238 



* H. M. NorriB. Engineering Magazine, Mar., 1899. 
♦ " Inventory Valuation of Machinery Plant." Trans. A. S. M. E., Vol. vii. p. 433. 



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DEPRECIATION. INVENTORY VALUATION. APPRAISALS 



89 



Charge all non-perishable tools of an unusual and irregular 
nature to special plant at cost. Let their value remain at this 
figure until the saving in cost on the future probable output of 
said tools falls below their cost. Then depreciate dollar for 
dollar, in accordance with the shrinkage that occurs from time 
to time in the total amount of saving that will be effected during 
the remaining term of their usefulness. — H. M. Noixis. 



The Relation between Perpetual-inventory Value and 
Appraisal Value * 

* * WTiat is your plant worth? You should know — exactly. You 
should know for insurance purposes, for financial purposes, for 
every purpose that has anything to do with the safe conduct of 
your business. You should know — must know — before you can 
calculate costs, overhead, profits; before you issue securities, 
make loans, place insurance. Your annual statement has a 
hollow foundation if its estimate of your assets as a going con- 
cern is based on the accountant's guess — a guess that has no 
better foundation than an estimate of costs at some past period, 
from which certain arbitrary percentages have been written off 
each year." 

This statement, taken from a publication of one of the appraisal 
companies, can be accepted as sound without committing our- 
selves to the conclusion which the appraisal company is anxious 
to establish: that the real worth of a plant for all purposes can be 
established only through the work of professional appraisers. 

Most plants grow from small beginnings, and during their 
early life expand as the needs dictate. The organization is nec- 
essarily small, because the most rigid kind of economy must be 
practiced, and original costs and the costs of additions are fre- 
quently so completely submerged in the total assets that no safe 
records of these costs can be established. The annual statements 
of plants 80 conducted have indeed a hollow foundation, for not 
only their assets but usually their profits are based on the account- 
ants' guesses. Industries so managed need the assistance of a 
competent appraisal company to inform them of the valu? of 
their assets, aa a basis for embtu'king on a sounder and safer 
system of accounting methods. 

Appraisals are also valuable in establishing comparative 
values of plants that are about to merge, or in serving as a basis 
of a scheme of financing. But the claims that an appraisal is 
necessary for figuring overhead costs and the selling price and 
profit of manufactured articles, are, to say the least, sadly over- 
drawn. 

Need for Determining a Proper Rate of Depreciation. Few 
owners are astute enough to foresee their needs for ten 3rears 
to come, and fewer still have the means to build or expand along 
the lines that will give ample opportunity for future business 
growth. It is safer by far, therefore, to provide proper sinking 
funds through an ample rate of depreciation, so that when build- 
ings that have outlived their usefulness require reconstruction, 
funds have been provided out of profits for rebuilding along more 
modem lines. 

Machine tools have changed very considerably as a result of 
the development of the Taylor- White and other high-speed steels, 
and companies that foUowed appraisal methods of depreciation 
find themselves with obsolete equipment and no funds to replace 
it with modem equipment. 

Patterns and small-tool equipment often have but temporary 
value and should disappear wholly from the inventory when they 
have served their purpose, yet these two items are fertile sources 
for inflation of values through appraisals. 

What the management of an industry is chiefly concerned in, 
is to provide a fimd through a proper scale of depreciation which 
will reimburse it for the difference between the cost price of a 
piece of equipment and its fair cash selling price when sold either 



♦Extracts from a paper by Charles Piez, Chicago, 111., 
ASM.E., 1916. 



Tran&, 



because it is ready for the scrap heap or because some newer 
form or method has made a change desirable. This difference 
is properly a part of the cost of the product, Jbut becomes so 
only by charging depreciation against the expenses of opera- 
tion. 

Depredalion not Properly Determined by Appraisal Companies, 
Has any appraisal company ever investigated the subject of 
depreciation from the operating standpoint and recommended a 
schedule of depreciation for adoption? Has any appraisal com- 
pany ever advocated that depreciation be distributed as an oper- 
ating expense against the product? Can any appraisal com- 
pany claim with any justice that it can determine proper rates 
of depreciation without close contact with and full knowledge 
of the operating conditions and operating needs of an industry? 
The primary business of an appraisal company is to determine 
an authoritative replacement value, and its entire organization 
is trained for this purpose. But when the appraisers enter the 
field of depreciation, operating values arid costs, they are doing 
their clients positive harm and are leading them straight to the 
shoals of financial disaster; for appraisals have a distinct upward 
tendency, and the increases in value which they show as the 
result of wholly extraneous conditions have the effect of lulling 
the manufacturer into a wrong sense of financial security. 

All of those with whom I have been associated in business 
for the last quarter of a century have been radicals in their 
methods of depreciation, but with all of this strong leaning 
toward what might be considered an excessive write-off, we fre- 
quently find when we are ready to discard a tool or reconstruct a 
building, that a substantial additional amount must be charged 
off to profit and loss. 

The great majority of industries charge off too little rather 
than too much, and the appraisal companies, if anything, are 
assisting, unconsciously, of course, in increasing this unprofitable 
and of ttimes disastrous habit. 

I had occasion recently to go over the financial statement of a 
manufacturing plant which had delegated the important function 
of depreciation to an appraisal company. The amount charged 
off annually was less than one-half of the proper amount, this 
being due, the owner said, to the constant and considerable 
advance in the replacement value of the property. Here was a 
typical case of reducing the operating burden of a plant by 
crediting it with a wholly speculative and unrealizable increase 
in property value. In this case the appraisal company specified 
the amount to be depreciated each year, and was, therefore, 
responsible for this wholly unsound and unscientific procedure. 
The owner is about to build a new plant, and I take no chances 
in prophesying that he has some bitter disappointments awaiting 
him in unforseen shrinkages of assets when he abandons the old 
plant. 

The problem of determining an adequate scale of deprecia- 
tion is by no means a simple one, and it goes hand in hand with 
the problem of distributing depreciation against the cost of the 
product. It is astonishing to find how widely the practice among 
different manufacturers in the same line varies. 

Proposed Standard Rates of Deprrciation. The manufacturers 
of conveyors and elevators have made an effort to agree on some 
standardized form of accounting procedure. The preliminary 
meeting of the manufacturers and their accountants disclosed 
the fact that, out of nine manufacturers, two disregarded the 
question of depreciation entirely, five charged off depreciation 
to profit and loss, and only two charged depreciation against 
operating expenses, making it thereby a component part of the 
cost. The rates of depreciation varied widely, and the first 
steps taken by the conference consisted in deten^ining a standard 
schedule of rates of depreciation. The rates are but com- 
promises growing out of the judgment and experience of the 
individual members of the conveyor manufacturers' conference, 
but their correctness can later be verified by matching the per- 
petual inventory values which these rates will establish, against 
the actual experience of loss in cash value when equipment or 
buildings are discarded. 



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90 



BOOKKEEPING AND COST ACCOUNTING 



Standabd Depbbciation Rates Adopted bt MANtrrAcruBBBs 


Cost Con- 


FEBENCE. Feb. 25, 1916 










Per Cent 




Per Cent 


on 




on Cost 


Reducing 
Balance 


Buildings and Accbssobies: 






Reinforced concrete or steel and tile 


2 


3 


Brick and steel with non-combustible roof and 






concrete floors 


2.5 


4 


Brick, steel and wood 


3 


5 


Brick and wood 


3 


5 


Steel frame, wooden roof and corrugated-iron 






walls 


3.5 


7 


Steel frame, non-combustible roof and corrugated 






iron walls 


3 


6 


Concrete block, with wooden roofs and floors 


3.5 


8 


All-wood structures, well built (20 years) 


4.5 


10 


All-wood structures, cheap (20 years) 


5 


12 


Sprinkler system (20 years) 


4 


7.5 


Heating and ventilating system (20 years) 


4 


7.5 


Water and sewer piping and sanitary fixtures 






(where separate) 


4 


7.5 


Tanks and reservoirs, steel 


4.5 


10 


Tanks and reservoirs, wood (10 years) 


9 


20 


Steel shelving, lockers, etc. 


5 


12 


Machinebt and Labgb Equipment: 






Boilers, pumps, feedwater heaters and air com- 






pressors 


6 


15 


Power piping 


6 


15 


Switchboards, main wiring and conduit 


6 


15 


Engines and dynamos 


5 


10 


Machinery, motors, machine tools, traveling 






cranes, etc. 


4.5 


10 


Punch presses, bending rolls, power shears and 






drop hammers 


4.5 


10 


Miscellaneous Real Estate Impbovements: 






Pavements, sidewalks, fences, retaining walls. 






roadways, tracks, yard drainage, general 






condmts, tunnels, vaults, etc. 


4.5 


10 


Cupolas, converters, melting furnaces and acces- 






sories 


5 


10 


Annealing and heating f urnac<^s, ovens, forges, etc. 


5 


10 


Motor trucks 


20 


60 


Storage battery locomotives (battery renewals to 






repairs) 


10 


30 . 


Horses and wagons 


12 


35 


Shafting, pulleys, hangers and belting * 


50 




Machine tool accessories — Boring bars, drivers, 






key seating broaches, etc. 


50 




(All renewals to Repairs) 






Small Tools: 






For machines, net additions 


50 




Hand tools, net additions 


50 




Punches and Dies (Standard), net additions 


50 




Chills. Ibon and Steel Flasks and Accessobibs, 






net additions 


50 




FiXTUBBS. FuBNITUBB AND MISCELLANEOUS EQUIP- 






MENT: 






1 Mechanical appliances, net additions 


60 




2 Departmental wiring and electric fixtures, net 






additions 


60 




3 Miscellaneous items (wood), net additions 


70 




Pattebnb (Standard): 






Metal, net additions 


75 




Wood, net additions 


100 




All patterns required for a particular order or 






contract to bo charged to the job. 


5 


5 


Dbawinos: 






All new standard drawings to be charged to ex- 






pense. 






All drawings required for a particular order or 






contract to be charged to the job. 







In a letter to the author, explaining the high rates of 
depreciation for small tools, fixtures, etc. Mr, Piez writes: 
" Only the items that are actively used in the fabrication of 
standard product are inventoried in this way, all other items 
being charged off wholly to expense. This seems somewhat 
radical treatment, but, as a rule, the inventory schedules 
for these several classes are catch-basins for all sort of charges, 
which seem to swell the inventory values without adding to 
the real assets of the manufacturing enterprise. 

With a new concern, such treatment of these items is, of 
course, more radical than is justified, and our own practice 
where entirely new departments have been built up, has been 
to assess these items with a depreciation charge of 15 or 20 
per cent per year, until they have been marked down to the 
point indicated by the schedule. 

In the case cited (a new shop purchasing $1000 worth of 
small tools at the beginning of the first year, and SlOO worth 
in each of the ensuing three years), we should chaise oflF 15 
per cent of $1000 cost of small tools for two years, and 20 
per cent for the third year, and we should write oflf 50 per 
cent of the $100.00 additional purchased each year. At the 
end of three years, therefore, the inventory on the original 
lot would be $500.00, and the inventory value of the three 
years' purchases of $300.00 would be $150.00, making a total 
inventory of $650.00 for the purchase price of $1300.00. 

In the discussion of Mr. Piez's paper Mr. R. J. Heame said: 

A perpetual inventory is a time saver. 

A written invoice of all goods junked is vital. 

It has been found best to number each section. S3rmbols 
should be avoided. At first they seem helpful, in the end 
they are a nuisance. 

The inventory items should all be on cards. Books are not 
practicable. 

Appraisal of present value can only be made by a competent, 
honest person, who knows all the facts and is familiar with the 
business. Appraisals by outsiders are of little value. 

Taking off a fixed percentage is unreliable. A simple test 
is to ask for how much cash you would be willing to part with 
the machine. Honestly applied this test will give an accurate 
value. 

Mr. Piez in closing the discussion said: 

An occasional check by actual count and a re-appraisal 
of the value of the active items on the basis provided in the 
schedule of depreciations is strongly advised. 

In order to compare the two schedules a condensed depre- 
ciation statement for a 34-inch boring mill costing $1318 and 
purchased Jan. 1, 18d4, developed first on a straight deprecia- 
tion of 4i per cent on the original cost and, immediately below, 
on a 10-per cent rate on the reducing balance, is given herewith : 

Inventory Valuation at End of Ysab 



At4J% 
At 10% 



1894 



$1258.69 
1186.20 



1895 



1199.38 
1067.88 



1904 



$665.69 
413.90 



1909 



$369.04 
284.23 



1914 



$73.49 
144.23 



1916 



$0.00 
116.83 



* Theae and the following items are depreciated once for all at the end of 
the first year after their purchase by the stated percentage, and the balance 
is then carried on the inventory without further reduction. 



By the second method the original cost is never wholly extin- 
guished, but the amount of depreciation thus written off each 
year approaches more nearly the shrinkage in value that usually 
takes place. Under normal conditions loss in the selling value * 
* Why should the selling value be considered ? The equipment is 
not for sale as a secondhand machine; it is being used, and its value 
to a going concern is what it would cost to replace it if it were burned. 



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DEPRECIATION. INVENTORY VALUATION. APPRAISALS 



91 



of any item of equipment is more rapid in the early years of its 
life than in the later years. Then, too, there is usually some 
scrap value at the end of the period. 

The method employed by many manufacturers of charging 
depreciation to Profit and Loss is wrong, for, while this method 
brings the book values of assets in line with actual values it 
does not make depreciation a part of the cost of production. 
AU equipment, jigs, templates or patterns especially made 
for a particular order should be wholly charged to that order, 
and the reduction in value of all other buildings and equip- 
ment, as determined by the schedule of depreciation must be 
considered as a legitimate expense of the business and charged 
against the cost of the product. The easiest way of accom- 
plishing this is to estimate in advance the depreciation of each 
department of the plant for the ensuing year, and assess one- 
twelfth of these estimates as monthly expense charges against 
the departments, as factors in the departmental overheads. 
Depreciation charges that cannot properly be assessed against 
any particular department should be assessed against general 
expense and distributed over the product through the general 
expense factors. 

Depreciation Appraisals for Insurance Purposes * 

The method developed by the appraisal department of 
the Factory Mutual Fire Insurance Companies is based 
on the theory that if the larger factors are carefully ap- 
praised, the less important items may be estimated in groups. 

The price values used for buildings and all the subdivisions of 
machinery are based on replacing new at today's market (regard- 
less of original cost) and these price values are then depreciated 
as judgment dictates. 

Depreciation of Buildings, A building badly out of repair 
naturally deserves fairly heavy depreciation. A building in 
good repair, but so antiquated in size and shape that it is man- 
ifestly unsuited for the uses to which it is being put, also deserves 
a reasonably heavy deduction. When, however, a building is 
of such dimensions that it perfectly answers its purpose, has 
remained plumb and is constantly kept in repair, actual age has 
little influence on judgment. It is considered that about 5 
per cent of the new value is enough. In other words, buildings 
are not depreciated a certain per cent a year, but have a flat 
amount deducted on account of condition and not on account 
of age. 

Depreciation of Machinery, Machines vary greatly both in 
the manner in which they wear out and in the rapidity with which 
they go out of date. In rare cases where a machine has been 
practically superseded in the market by one that will cost much 
less, it is better practice to use for a new value the cost of the 
less expensive machine rather than show an excessive deprecia- 
tion. As a rule, the amount deducted applies chiefly to wear. 

With machines that need repairs at all points from time to 
time, a day arrives after a period of years when it is better to 
throw- them out altogether and replace with new rather than 
continue to repair them. Practically all textile machines come 
in this class, as do engines and other power plant machines, and 
also some machine tools, wood working and paper-working 
machines. To all of that nature a depreciation table is applied, 
allowing 2, 2i, 3, 4 or 5 per cent a year, deducted from the net and 
not from the gross. If a machine is entirely rebuilt, it is usually 
considered to be worth at that time within 5 per cent of new 
value and the table is applied for succeeding years. In either 
case, the probable average life is ascertained and the table that 
best fits is used, but seldom is the depreciation carried to a point 
beyond 50 per cent. 

There are many kinds of machines where the main portion, 

♦ Extracts from a paper by John Q. Morae, Appraiser, Inspection 
Devi Assoc. Factory Mutual Fire Insurance Companies, on "Ao- 
curaie AppraisaU by Short Method^:' Trans, A.S,M.E„ I9I6. 



sometimes as much as 80 per cent of the total value, remains for 
years with practically no wear. The small moving parts, how- 
ever, we€ur so rapidly that they are constantly being replaced. 
This is true of a great variety of machine tools, metal, wood and 
paper-working machines. With these it is considered that the 
wearing parts are always in a state of 50 per cent depreciation, 
and the amount deducted is half of the percentage the value of 
the wearing parts l^ears to the total value of the machine. This 
method also applies to rolling mills, rubber mills and calendars 
where the frames and gearing remain intact for years and the 
rolls constantly wear down and are replaced. 

There is another class where neither the depreciation .table 
nor the average described above can be used. This includes 
most of the machinery in paper mills, bleacheries and dye works 
where wet processes are used. These machines wear rapidly 
and are frequently rebuilt. Paper machines in particular are 
composed of a train of parts and from time to time different 
sections are either rebuilt or removed entirely and replaced. 
The depreciation in such cases depends upon the condition at the 
time of the appraisal and is not influenced by the age of what 
remains of the original machine. 

Depreciation of Shafting^ etc. Shafting shows such slight 
wear that depreciation is seldom recognized. It is becoming 
the custom, however, to show either a slight deduction or else 
purposely record the new value at a conservative figure when, on 
account of poor arrangement an amount in excess of what is 
needed ia in use. 

Main belts wear slowly, while machine belts will always 
average 50 per cent wear, so that, as a rule, the total amount of 
belting is depreciated 33} per cent. 

Piping will last for years, except where exposed to acid funics. 
Pipe covering and valves show wear, but piping as a whole is 
seldom depreciated more than 10 per cent. 

Electric wiring wears httle and is usually kept pretty well up 
to date on account of the rigid rules of both local authorities 
and the insurance companies. It, therefore, seldcm deserves 
much depreciation. 

The miscellaneous equipment classed • under the head of 
"furniture and apparatus" is made up of objects most of which 
are constantly wearing out. The amount is, therefore, usually 
depreciated from 20 to 50 per cent. 

Small tools, dies, print rolls and electrotypes wear out, but 
they are affected to a great extent by obsolescence. Patterns, 
drawings, moulds and lasts are subject to depreciation for the 
latter reason only. In determining the amount to be deducted 
from the new value of any of these the appraiser must ascertain 
what proportion of the equipment is indispensable or practically 
new. 

Appraisals of Manufacturing Property * 

We define the valuation of industrial property as the value at 
which the ph3rsical manufacturing property of a corporation is 
carried on its books. 

Our view is that the valuation of land, buildings and equip- 
ment should be shown on the books at their original cost, less a 
depreciation for use or obsolescence. As a check on our valua- 
tions and on our depreciation ratios, we have appraisals made by 
professional appraisers at intervals of approximately ten years 
and compare results carefully with our valuations. 

In contrast with the accounting method, which should be 
based on actual cost, we believe that appraisals should be made 
on the basis of present cost to replace, less proper allowance for 
age or for obsolescence, rather than on the basis of original cost, 
as the latter may be diflScult to determine at the time of the 
appraisal. Great care should be exercised in comparing appraisal 
values made on the basis of replacement values to avoid taking 
advantage of an abnormal present cost, such, for instance, as 
would occur in the case of appraisals made at the present time, 
due to the very high prices of practically all materials and labor. 
* J. B. Milliken, Treasurer, The Yale A Towne Mfg. Co., Stamford, 
Conn., Jour A,S,M,E„ Feb., 1917. 



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CHAPTER X 
"SYSTEMS" AND "RED TAPE." FUNDAMENTALS OF A COST SYSTEM 



Use of Red Tape. Prosperity depends on *'red tape" — a 
system of high organization which can have its root and its fruit 
only in strict adherence to clearly outlined divisions of respon- 
sibility and authority and in accurate recording of the minutest 
details.— Geo F. Stratton, Eng. Mag., Vol. 34, p. 669. 

Unless a controlling common sense is continually exercised, a 
system of red tape may be developed which will be out of all 
proportion to the actual requirements of the business. 

System overdeveloped becomes red tape, and that perhaps Iz 
to be avoided as much as lack of system. — Humphreys on 
" Business Engineering." 

Red Tape is simply bad system, system that has never been 
tackled by all the individuals of a loyal and interested organiza- 
tion determined to answer the following questions: 

1. How can we simplify? 

2. How can we eUminate? 

3. How can we condense? — F. B. Gilbreth in "Practical Talks 
on Contracting." 

Too much cost system, too many figures, defeat the real pur- 
pose of costs, clogging action. — B. A. Franklin, Eng. Mag,^ Vol. 
43, p. 709. 

One of the essential elements of scientific management 
is study of the subject of waste, whether of capital, material 
or time, or even of ink and of red tape. The work of the 
committee on information and statistics, and especially that 
of the " leak hunter," will include the study of whether the 
excessive use of red tape hinders the progress of the work or 
is costly in itself, and of finding ways by which the use of red 
tape may be curtailed. The words " red tape " are now used 
to signify any systematic method of making records, issuing 
requisitions or orders, checking agaiast mistakes, counter- 
signing checks and the like. In scientific management prop- 
erly applied this so-called red tape is used only so far as inves- 
tigation shows it to be necessary or desirable, and automatic 
machinery or other means are used to make the quantity of it 
as little as possible. — Wm. Kent, in " Investigating an 
Industry." 

One fact that has retarded the extension of cost accounting is 
the unnecessary and the expensive refinement to which it is 
sometimes carried. There can be no objection on principle to 
red tape when that tape is necessary to tie together the organi- 
sation; but sometimes there may be too much of it. 

It is a waste of valuable time and energy to attempt to make 
each detail of the estimate absolutely correct. — C. B. Thompson. 

The System-mad Manager. System is the rut in which some 
men are proud to five. 

The systematic type of manager is a decided improvement on 
the rule-of-thumb type. 

Averages are the fallacy of the system-mad manager. — 
E. St. Ehno Lewis. 

If there is one thing more than another that excites criticism, 
it is red tape that does not justify itself in practical results. 
It may show itself in a mass of undigested reports, troublesome 



to make up in the shop and impracticable to use in the ofiioe, 
or it may take the forms of volumes of data that no one ever 
looks at. Another form of red tape, not uncommon, is carrying 
small items of cost to such a degree that the process of deter- 
mining them is more expensive than the costs themselves.— 
Nicholson. 

Cost Systems in Government Shops. Captain Metcalfe 
thus describes a part of the S3rstem in use in United States 
Arsenals before his book* was written (1885). 

Timekeeping. The timekeeper, generally the foreman, goes 
about the shop towards the close of the day and asks each work- 
man how he has spent it. According to the workman's recol- 
lection he enters the time reported in a book. At the end of the 
month these time books go to the main oflSce where the clerks 
use them in making up the pay roll, and afterward allotting the 
various charges among the appropriations to which they belong. 
But the latter part of this work is, from the nature of the case, 
very imperfectly performed. The entries are confusing and 
indefinite. So the deciphering of these entries falls, as does the 
statement of the work done, and the cost of the fabricated product, 
upon the foreman, again burdening him with work for which he 
is not fitted, and interfering with the free exercise of his proper 
functions. 

Procuring and Accounting far Material. 1. Let us take the 
simplest case first, and suppose the material to be in store, and 
the foreman to know it. He makes an entry in the "Store 
Book"; the commanding oflScer signs it; the book goes to 
the ordnance storekeeper or one of his assistants, who sends the 
material and the book, when he can get it, to the foreman. The 
latter receipts for the material on the margin of the original 
entry; the material is expended on the books of the storekeeper 
and the transaction is at an end. 

2. When there is nothing suitable in store or the foreman 
thinks there is not, he makes his wants known on the "Purchase 
Book." As this book is kept in the office, he goes there, taking 
a memorandimi of his wants; they are thus written twice (1, 2). 
They are then approved by the commanding officer (3) ; written 
on an order blank (4); copied on a duplicate stub (5); signed 
again by the commanding officer (6); and sent to the dealer (7). 
The supplies come with the bill, which is copied into the inspect 
tor's book (9) and initialed by him after inspection (10). To get 
it out of store, the foreman, still desiring them, writes them again 
on the store book (11), and after being again approved by the 
commanding officer (12) the book goes to the storekeeper, who 
takes the material and the book, when he can get it, to the fore- 
man, whose receipt (13) ends his share of the business. The 
initialed bill then goes to the ordnance storekeeper, who receipts 
for the stores on the duplicate stub (14). The assistant store- 
keeper also keeps a record, of a more or less perfect kind, of all 
receipts into (15) and issues from (16) his storehouse. 

From the stubs receipted by the ordnance storekeeper and 
the bills received from the dealer, is made out a certificate of 
inspection (17) signed by the assistant inspector (18) then by 
the commanding officer as principal inspector (19) then the 

* The Cost of Manufactures and the Administration of Work- 
shops. Public and Private. 



92 



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"SYSTEMS" AND "RED TAPE." FUNDAMENTALS OF A COST SYSTEM 



93 



material is receipted for again by the ordnance storekeeper 
(20); then approved by the commanding oflScer and forwarded 
to Uie chief of ordnance for payment to be authorized (21); 
then returned by the chief of ordnance for payment (22); 
Vouchers in duplicate (23, 24) are then made out, approved 
by the commanding officer (25, 26) and the creditor's receipt 
affixed to each (27, 28) after payment. The purchase is then 
entered in duplicate on the monthly abstract of piu*chases, a 
cash paper (29, 30); and again in duplicate on the Quarterly 
Abstract of purchases, a property paper (31, 32). The Ord- 
nance Storekeeper credits himself with the expenditure of the 
same items on the abstract of expenditures, also in duplicate 
(33, 34). 

Examples Illustrating the Practical Use of the Service Cards. 
NoTC— The card is bere reduced to fit the page. 

(7) 

SERVICE CARD, Frankford Arsenal *PR 8 1885 

No. Name. Price per onit 

235, Lannigan, 0,25. 



Charge to- 


Nature of service in detail 


No.5)r uiits. 


so. 40/ 


N. B. Make bat one entrj on each card. 


Pieces. 


Time. 


C. cT 






AMOUKT. 




cfy 




o.a€. 


DoU's. 


Cents. 


N. c?-/ 


'<9 





(8.) 

SERVICE CARD, Frankford Arsenal. 

No. Name. 

235, Laiinig:ant 



APR 8 188S 

Price per oniL 

0,26. 



dMrgeto— 


Nature of service in detaa. 


Na of nnits.. 


S-O. 40/ 


N. B. Make bat one entry on each card. 


Pieces. 


Time. 


c. cJ. 










^y 




o.o^ 


DoU's. 


Cents. 


s^ 


'J 





The Card System. Capt. Metcalfe proposes to use cards 
instead of books for original entries. He says : 

"For every act or name to be recorded, there shall be a 
separate card; so that the cards being combined or classified, 
the acts or names they represent will be so too. For this pur- 
pose I propose the use of single cards for all initial records, and 
their gradual consolidation by the simplest mechanical means 
until they are finally transcribed into the permanent books of 
record. 

The independence of a representative unit of record is the 
basis of system I propose, combined with the use of a nomen- 
clature by which all acts and their purposes may be set forth by 
the actors in such form as to be intelligible to those whose proper 
office it is to enroll and classify them. 



The following are the cards required to carry out the 
system: 

1. The order card or ticket, 

2. The service card, 

3. The material card, 

4. The correspondence card. 

CASE II. 
Drawing Afatenal from Outside the Arsenal U be held m Charge, 



Frankford Arsbwai. MAY 24 I8S3 (f,y 
Receipts and issnes from, Q&.(J.) to A (/.) to to 



Per ABSTRACT, 



▼OUOHEB, 



QUANTITY. ^''• 



«(..r.) 



443(s,c.) 



No. Unit. 

Assnmed. 



^^(/.) 



Actual. 



i^C/) 



Price per qniL 
AMOUNT. 



NAME. 



Condition. 



N. B. Make bot one entry on each card. 

(/ eomcttd fy s,€,) 
etui (/.r.) 



OBARaBTO 



8^ O. 



i¥4 






O^Jcot* 



waioar, uba. 



MBAtlTBB. Ft. 



N. 



TO 



BO. O. 



OI^Mt 



N. 



Received froin« or sent to 



AUTHORITY^ 



CO 



Samples of the service and material cards, repro- 
duced from Capt. Metcalfe's book, reduced in size, are 
here shown. The actual service card is about 4§x5§ 
inches. 

The card system proposed by Capt. Metcalfe has been 
generally adopted in Government shops, but, as shown in 
some of the testimony given before Congressional Investi- 
gating Committees, much yet remains to be done in the 
way of cutting out unnecessary red tape. Quotations from 
this testimony are given on the nejct page. 

Accounting systems in Government arsenals: 

Major O. M. King, Ordnance Dept., Rock Island Arsenal, 
Rock Island, III. Testimony Jan. 12. 1913, before the 
Special Committee of the House of Representatives to inves- 
tigate the Taylor and other systems of shop management, 
Vol. 2. 



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94 



BOOKKEEPING AND COST ACCOUNTING 



(Abstract), p. 1081. The engineering division makes up a list 
of parts necessary to finish an order. A copy of this list goes to 
the planning room. 

The planning room determines the different operations to 
perform in order to complete any particular part. This is 
entered on a route sheet. 

For each particular operation a job card is made. 

A move ticket is issued, which is to follow the material from 
the storehouse to the different machines and to the assembling 
place. 

When the material is moved to the first machine, the card 
comes back to the division, notifying it that the material is at 
the machine. 

Then the shop card covering the operation is posted. 

(Time studies and instruction cards had not then been intro- 
duced). 

Gen. Crozier's testimony. 

P. 1128. In ascertaining the cost of our productions, I have, 
of course, encoimtered what every manufacturer encounters, 
namely, the elusive nature of costs. It is very difficult to ascer- 
tain costs. 

Mr. Redfield (to Mr. Pepper) : I wish you would bear that 
phrase in mind; it would make a classic. 

P. 1 130. In some establishments there is a process which still 
exists; a timekeeper with a ruled sheet on a board would walk 
about the shop every day and ask each workman how much time 
he has spent on different jobs that he had worked on that day 
and put them down with more or less accuracy — often consider- 
ably less. The job card contains: No. of the work to which the 
expense is to be charged. Symbol of the form No. for this card. 
Man's name and No. Symbol for the portion of the shop in 
which he works. Piece symbol. Lot No. No. of the operation 
and enough of the description of the operation to understand 
it. Name of the article and a statement of what the man is to 
do. No. of the drawing. No. and location of the machine. 
All this is placed on the card when it is handed to the man. 
The time is stamped on the card when it is given to him, and 
when he returns it. 

Cost Accounting in the Brooklyn Navy Yard. (Extract 
from the testimony of Adolph Muller, sheet-iron worker, in a 
hearing before a special Committee of the House of Repre- 
sentatives to investigate the Taylor and other systems of 
Scientific Management, Oct. 25,. 1911, Government Printing 
Office, 1912, Vol. 1, p. 672.) 

Now, in cost accounting in repairs for ships — I am the planner 
over there and had occasion to make out the instruction cards 
to make 74 brackets for the storage of fire extinguishers. In 
order to get at the cost accounting on account of these brackets 
being made to be installed on 13 different ships, and being that 
there were so many operations on each bracket, it necessitated 
the writing of 104 instruction cards and 104 duplicates. I 
complained about having to writ« out 104 tickets for a small job 
that in my estimation wouldn't cost any more than 140 to do, 
and he instructed me to put all the job numbers on the one 
ticket. There wasn't room on the ticket to do it, and I sug- 
gested to attach a slip, which I did, with all the job numbers 
written on the slip. 1 distributed those slips and told the men 
to charge up their time pro rata, so that left the man to do more 
figuring according to that system than he would have had to do 
if he had no system at all, because prior to that the charging of 
the time was left to the clerk, and the clerk would divide up the 
time equally. 

Now, the condition is this, that a man has all those job nimi- 
bers, and he must divide up his time and send his card in to the 
accounting department in order to receive his pay, with the 
number and the amount of time written on it, and the result is 
that the men are not bookkeepers and the time isn't being sent 



in right and the job isn't finished yet, but the cost accounting 
on that job will be anjrthing but what it should be. 

A Better System. Here is the way the accounting might 
have been done under a better system. 

The Navy Yard receives from the Bureau of Construction 
and Repair an order " Make 74 brackets for fire-extinguishers 
as per sketch herewith. Deliver them to warehouse tagged 
as follows, 5 for Columbia, 6 for Connecticut," etc. 

The planning department has a working drawing made with 
complete instructions, and makes as man}'^ job tickets as 
there are men who are to work on the several operations. 
The first card contains, or has attached to it an order on the 
storekeeper for the raw material needed. The move man 
with this order gets the material and takes it to the place 
where the first operation is to be done, and returns the order 
to the planning room with the storekeeper's check on it 
showing that the material has been delivered, and a memo- 
randum of the kind, quantity and price. When the workman 
who is to do the first operation (or series of operations), has 
finished his preceding job he gets the job ticket for his work 
on the 74 brackets, has it stamped by the time clerk and pro- 
ceeds with the work. When it is finished he returns the 
ticket with the time stamped on it, and with the foreman's 
or inspector's check certifying that the work has been done 
properly. The job tickets for the remaining operations are 
given out and returned in like manner. When all the opera- 
tions are finished the accounting department enters on the 
tickets the costs for material, labor and burden and makes a 
Piece Cost Card for the 74 brackets, which summarizes the 
information on the job tickets, credits Labor, Stores and 
Burden accounts with their respective portion of the costs, 
and charges Warehouse with the total. Thus, the cost 
accounting is complete up to the delivery of the brackets 
to the warehouse, which is credited and the different ships 
charged as each receives its proportion of the brackets. 

The Federal Trade Commission's Cost System Funda- 
mentals. The Federal Trade Commission, Edward N. Hur- 
ley, Chairman, has published a pamphlet of 31 pages entitled 
" Fundamentals of a Cost System for Manufacturers." It 
presents some good arguments in favor of the use of a cost 
system by manufacturers, and outlines in some detail the 
elements of such a system. In general, it shows a regular 
double-entry journal and ledger system, the ledger having 
36 accounts. The conrnaercial and factory accounts are all 
included in one ledger, and the costs determined, as far as 
the pamphlet goes, are the total costs for a month of " work in 
process " and of finished goods. The " Job Cost System " is 
recommended and briefly described, but no example of its 
use is given. 

In the system described Accounts Receivable is debited 
with Sales, and credited with Sales Returns, Allowances, and 
Discounts, also with Cash for cash sales, and with Reserve 
for Bad Debts. Accounts payable is credited with all indebt- 
edness incurred for material, labor and expenses of all kinds, 
and debited to Cash and to Discounts on Purchases as the 
indebtedness is settled. Work in Process is charged with 
Material and Labor directly expended in production, and 
with Overhead, which is subdivided into three departments 



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"SYSTEMS" AND "RED TAPE." FUNDAMENTALS OF A COST SYSTEM 



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A, B, and C, each of which is charged on the basis of the 
" productive hours," 67 cents per hour for A, 52 cents for 

B, and 15 cents for C. The total indirect expenses, sub- 
divided into Labor, Building Expense, Power, Insurance, 
Taxes, Repairs, and General Factory Expenses, together with 
Reserve for Depreciation are charged to these three over- 
heads. Finished Goods is charged and Work in Process 
credited with the cost of goods put in warehouse, and Finished 
Goods is credited and Trading Account charged with the cost 
of goods sold. Profit and Loss is charged with Shipping, 
Selling Expense, General Expense, Discount on Sales and 
Reserve for Bad Debts, and credited with the gain on Trading 
Account and with Discounts on Purchases. Surplus account 
is credited and Profit and Loss charged with the credit 
balance of Profit and Loss Account. 

The complete ledger entries of the 36 accounts, including 
196 entries from the journal and 12 balancing entries, a total 
of 208, are given in six pages of the pamphlet. By transcrib- 
ing the 196 entries to the form of the Combined Journal- 
Ledger or Column Ledger (see page 17, ante)^ and dividing 
the ledger into two, a Commercial Ledger and a Factory 
Ledger, the number of the entries is reduced to 103, viz.: 28 
in the Commercial Ledger and 75 in the Factory Ledger, 
as shown below, on page 97. Two additional accounts are 
needed m making this division, Factory Account, to which 
all transactions between the Company's office and the fac- 
tory are charged or credited in the Commercial Ledger, and 
Company Account, for the same transactions, in the Factory 
Ledger. At the bottom of the Factory Ledger there is a 
statement of " Details of Credits to Company Acct." con- 
taining 20 items which might have been made as entries in 
the Factory Ledger, increasing the number of accounts in 
it from 19 to 28 and the number of entries from 75 to 95, but 
it is more convenient to enter them in a separate state- 
ment. 

In the Balance Sheet (page 96) are entered in the two 
middle columns the total charges and credits of the several 
accounts in the Commercial and Factory Ledgers. In most 
of the accounts the Dr. and Cr. sides balance (8 out of 15 
in the Commercial Ledger and 9 out of 17 in the Factory 
Ledger, as shown by the check marks at the right of the 
figures in the columns headed Total Charges). When the 
account is open or unbalanced, the difference between the 
two sides is added to, or subtracted from as the case may 
require, the balance at the beginning of the month to obtain 
the balance at the end of the month. 

On page 98 is shown a modified form of the Factory Ledger 
which has some advantages. The number of accounts is 
reduced from 19 to 10, and the number of entries from 75 to 
27. Eight accounts. Building Expense, Power, Insurance, 
Taxes, Reserve for Depreciation, Repairs, General Factory 
Expense, and Shipping, are lumped together in one " control " 
account. General Charges, and they are taken care of in a 
separate ledger form, entitled Distribution of General Charges 
and Overheads. The last two columns are added to give the 
details of the entries in the Condensed Ledger: Gen. Charges 
to Labor, $1051.00 and to Gen. Charges, $436.66. The 
Details of Credits to Company Acct. at the bottom of the 



ledger on page 97 should also be given, to show the details 
of the item Gen. Charges to Company, $3079.35. 

The advantages of the Column Ledger, or Combined 
Journal-Ledger over the old style double-entry journal and 
ledger have already been explained (pages 20 and 30), 
but for convenience they may here be restated. 

Instead of a page being required for each ledger account 
only two pages— or sheets to be bound in a loose-leaf binder— a 
month are required, one for the Commercial Ledger, the 
other for a Factory Ledger. 

Making a double entry, debiting one account and crediting 
another, is done by writing the amount once in the proper 
column and line; no other writing whatever is needed, 
the titles of all the accounts being printed. 

The Journal is made unnecessary. Instead of making a 
Journal entry as follows: 



(3) 
(10) 

(II) 

(12) 



Sundries 

Bldg. Exp. 
Overhead A 
Overhead B 
Overhead C 



To Power 



(4) 






641 




84 


to 






252 


30 






336 


40 






166 


20 





00 



and then posting the amounts on five pages of the ordinary 
double-entry ledger, a single entry is made in column 4 of the 
Factory Ledger, on lines 3, 10, 11, and 12, of the figures 
84.10; 252.30; 336.40; 168.20. The sum of these figures 
841.00 will be entered at the bottom of column 4 if there 
are no other credits of Power account, otherwise the total of 
the column vrill be entered when it is added up after all the 
entries are made. 

A most important advantage, not heretofore mentioned, 
is that photostat copies of the journal-ledger pages and of 
the balance sheet may be used, instead of the usual form of 
reports, laboriously transcribed from the old-fashioned 
ledger, for the information of officers and directors. 

The functions of the cost system are stated in the pam- 
phlet as follows: 

A "Cost System" provides not only for the determination of 
the amount of each element (material, labor, expense), of cost 
properly chargeable to each job, but also provides for an improved 
method of bookkeeping which causes the books to reflect at all 
times the true financial and industrial condition of the business 
and renders possible the preparation of monthly statements of 
conditions, as well as complete monthly statements of financial 
and factory operations. 

This long sentence charges the Cost System with far more 
duties than should properly be laid upon it. It charges it 
with certain functions which belong to bookkeeping, account- 
ing and statistics, and to statements of industrial conditions, 
which are functions of other departments. 

The functions of the several departments may be labeled 
as follows: 

Bookkeeping, Recording in proper form the receipts and 
expenditures of the business, sales, purchases, cash, bills 
and accounts payable and receivable, salaries, pay roll, etc. 

Accounting, Organizing the bookkeeping system and 
causing it to show not only the record of receipts and expend- 
itures, but their relation to merchandise, cost of plant and of 



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96 



BOOKKEEPING AND COST ACCOUNTING 



its operation, discount and interest, depreciation, repairs 
and other expenses, profits and losses; financial conditions 
of the business. 

Statistics. Historical record of accomplishment of the 
business. Goods made and sold, divided into classes and 
departments. Total and. departmental manufacturing costs, 
buying, selling and general expenses. Comparisons by 
months, seasons and years, and by classes of goods dealt in. 



IndvMrial Conditions. Reports as to labor, buildings, 
machinery, transportation, efficiency of manufacturing and 
selling departments, market conditions, etc. 

Commercial Costs, Furnished by the accounting and 
statistical departments. 

Factory Cost System, Costs (labor, material, and fac- 
tory expense) of each kind of article produced, and of each 
job. 



Monthly Balance Sheet Jan., 1916 



Commercial Ledger 





Balance Jan. I 


1 

Monthly 


Balance Jan. 31 




Dr. 


Cr. 


Charges 


Credits 


Dr. 


Cr. 


16 SaLa 










13.485 


60 


13.485 


60 










17 Sales Returns 










865 


20 


865 


20 










18 Sales Allowances 










50 


00 


50 


00 










19 Outbound Freight 










120 


00 


120 


00 










20 Trading 










13,047 


52 


13,047 


52 










22 Selling Expenses 










1.120 


53 


1,120 


53 










23 General Expenses 










1,180 


67 


1.180 


67 










24 Discount on Purchases 










165 


40 


165 


40 










25 Discount on Sales 










95 


00 


95 


CO 










26 Reserve for Bad Debts 






125 


00 


64 


00 


70 


00 






131 


00 


27 Profit and Loss 










4,222 


28 


4.222 


28 










28 Accounts Receivable 


6.000 


00 






13.485 


60 


10.949 


20 


8,536 


40 






29 Accounts Payable 






6.250 


00 


15,515 


90 


19,499 


71 






10.233 


81 


30 Cash 


17.061 


00 






9.875 


00 


15.350 


50 


11,585 


50 






34 Capital Stock 






100.000 


00 














100,000 


00 


35 Unissued Stock 


15,000 


00 














15,000 


00 






36 Surplus 






5.000 


00 






1.518 


89 






6.518 


89 


38 Factory 


73.314 


00 
00 






17,765 


57 


9,317 


77 


81,761 


80 






Total 


111,375 


111.375 


00 


91.058 


27 


91,058 


27 


116,883 


70 


116,883 


70 





Factort Ledger 




















1 Material 


3,000 


00 






8.084 


32 


6.484 


32 


4600 


00 






2 Labor 






200 


00 


5,692 


28 


6,179 


07 






686 


79 


3 Building Expenses 










508 


60 


508 


60 










4 Power 










841 


00 


841 


00 










5 Insurance 










828 


00 


72 


00 


756 


00 






6 Taxes 










1,095 


00 


94 


25 


1,000 


75 






7 Depreciation Reserve 






1.240 


00 






328 


74 






1,568 


74 


8 Repairs 










589 


23 


589 


23 










9 General Factory Expenses 










467 


99 


467 


99 










10 Overhead, A 










1,207 


34 


1,207 


34 










1 1 Overhead. B 










1,431 


74 


1,431 


74 










12 Overhead, C 










816 


35 


816 


35 










13 Reserve for Overhead 










273 


43 


273 


43 










14 Work in Process 


2.000 


00 






14,110 


99 


12,086 


13 


4.024 


86 






15 Finished Goods 


3.754 


00 




{ 


12,086 
597 


13 
1? 


} 8,801 


53 


7,635 


72 






21 Shipping 










237 


19 


237 


19 










31-33 Real Estate and Equipment 


66.000 


00 














66.000 


00 






37 Company 






73,314 


00 


9,317 


77 


17,765 


57 






81,761 


80 


Total 


74.754 


00 


74,754 


00 


58,184 


48 


58.184 


48 


84.017 


33 


84.017 


33 



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'SYSTEMS" AND "RED TAPE." FUNDAMENTALS OF A COST SYSTEM 



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98 



BOOKKEEPING AND COST ACCOUNTING 
Factory Ledger— Condensed 

















Credit Accounta 




























, 


2 




10 


n 


12 


13 


14 


15 


37 




Charge Accounts 


Materia] 


Labor 


General 




Overheads 




Reserve 


Work 


Finished 


Com- 


Total 








Charges 


A 


B 


C 


for Over- 
head 


in 
Process 


Goods 


pany 


Charges 


1 Material 






































6,084 


32 


8.084 


32 


2 Labor 






































5.692 


28 


5692 


28 


General Charges 






1,051 


00 


436 


66 


























3,079 


35 


4.567 


01 


10 Overhead, Dept. A 






246 


50 


770 


92 














8^ 


32 










105 


60 


1.207 


34 v' 


1 1 Overhead. Dept. B 






251 


20 


1,055 


14 


























125 


40 


1,431 


74 v' 


12 Overhead. Dept. C. 






165 


70 


549 


15 


























81 


50 


816 


35 v' 


13 Reserve for Overhead 


















119 


78 


153 


65 


















275 


43 v' 


14 Work in Process 


6.484 


32 


4.444 


67 






1,207 


34 


1,311 


96 


662 


70 


















14,110 


99 


15 Finished Goods 






























12.086 


13 






597 


12 


12.683 


25 


37 Company 










327 


13 














189 


11 






8,801 


53 






9.317 


77 


Total Credits 


6.484 


32 


6.179 


07 


3.139 


00 


1.207 


34 


1,431 


74 


816 


35 


273 


43 


12.086 


13 


8,801 


53 


17,765 


57 


58.184 


48 



Distribution of General Charges and Overheads 

Credit Accounts 





3 


4 


5 


6 


7 


8 


9 


21 








Charge Accounts 


Building 


Power 


Insur- 


Taxes 


Reserve 


Repairs 


General 


Ship- 


Total 


Labor 


General 




Expense 




ance 




for 




Factory 


ping 


Charges 


Credits 


Charges 












Dcpn. 




Expense 










, 


1 
3 Building Expenses 






84 


10 


12 


00 


20 


00 


40 


00 


65 


00 










221 


10 


185 


00 


221 


lO 


4 Power 










8 


00 


10 


00 


40 


00 














58 


00 


300 


00 


58 


00 


8 Repairs 










2 


00 


2 


50 


13 


33 














17 


83 


356 


40 


17 


83 


9 General Factory Expenses 


76 


29 






























76 


29 


92 


60 


76 


29 


10 Overhead, A 


101 


72 


252 


30 


12 


00 


15 


00 


75 


00 


159 


00 


155 


90 






770 


92 










1 1 Overhead, B 


127 


15 


336 


40 


16 


00 


20 


00 


100 


00 


247 


80 


207 


79 






1,055 


14 










12 Overhead. C 


101 


72 


168 


20 


7 


00 


8 


75 


43 


75 


115 


43 


104 


30 






549 


15 










21 Shipping 


50 


86 






1 


00 


1 


25 


8 


33 


2 


00 










63 


44 


117 


00 


63 


44 


37 Company 


50 


86 






14 


00 


16 


75 


8 


33 










237 


19 


327 


13 




00 


1 «* 




Total Credits 


508 


60 


841 


00 


72 


00 


94 


25 


328 


74 


589 


23 


467 


99 


237 


19 


3.139 


00 


1,051 


66 



Balance of General Charges Account 



Unbalanced Accounts, Factory Ledger 





Dr. 


Cr. 


Balance 


Dr. 




Cr. 




Insurance 

Taxes 

Reserve for Depreciation 


828 
1.095 


00 
00 


72 

94 

328 

4.567 
3.139 


00 
25 
74 

01 
00 


756 

1.000 

328 


00 Dr. 
75 Dr. 
24 Cr. 


General Charges 
Material 
Work in Process 
Finished Goods 


1,428 
1.600 
2.024 
3.881 


01 
00 
86 
72 


Compauy 
Labor 


b.447 
486 


80 
79 


Dr. Balance 
General Charges Dr. in Ledger 
General Charges Cr. in Ledger 


1,428 
1.428 


01 
01 




8.934 


59 


8,934 


89 



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CHAPTER XI 



DAILY AND MONTHLY RECORDS. CHARTING OF STATISTICS. COST OF IDLENESS 



DAILY RECORD OF WORK IN PROCESS. NUMEROUS 
OPERATIONS ON ONE PIECE. 

Form NMl shows the method used by the National Meter 
Co. for keeping track of the number of pieces of one kind 
through a sequence of several operations. The figures may 
require some explanation. The first figure, 33,250, is the 
number of pieces that had been delivered from the foundry 
from the beginning of the order (or it may be from the first 
of the year) up to Nov. 23, and 337 is the number delivered 
on that day. There were 54 pieces on haixd at the first ma- 
chine, No. 453, and the 337 added make 391; 337 pieces 



were drilled and passed to the second machine, No. 475, as 
entered in the second line under " Received," leaving a 
balance of 54 remaining to be drilled on the following day. 
The figures in the column " On Hand " show the number 
of pieces at the several machines at the beginning of the 
day, and the figures under ** Balance " the number of pieces 
at the end of the day; which figures are entered in the *' On 
Hand " column of the next day. Up to the end of Nov. 24, 
from the beginning of the order 33,937 castings had been fur- 
nished, which are all to be accounted for; 1372 had been 
rejected as defective, and 2550 were at the machines, making 
30,015 parts that had been completed. 



(Sise 8X5 in.) 

Part No. B 1786 H'ln. 



Stock on Hand and in Pbocbbs at End of Dat 



Bodies 



Date. Nov. 23. 1915 





Time on 
Machine 


Material 

Furnished 

33.250 


Matebial in Process 


Operation 


On Hand 


Received 


Total 


Finished 


Defective 
1362 


Balance 


Parts 

Completed 

29.617 


DriUC Ho 
Kdgfi and Faoe 
Chamfer 

1 Rough 
Refaoe 
Slotting 

2 Rough 
Finished Cut 


453-2 
475-10 
213-4 
461-10 
476-10 
367-1 
69-10 
319-5 


337 
33,587 


54 
235 

114 
317 
244 
889 
418 


337 
337 
220 
155 
210 
216 
60 
240 


391 
572 
220 
269 
527 
460 
949 
658 


337 
220 
155 
210 
216 
60 
240 
198 


7 


65 
59 
311 
400 
702 
460 


198 
















1369 


2403 


. 29.815 






33,587 








Nov. 24, 


1915 






DriUC Ho 
Edge and Face 
Chamfer 

1 Rough 
Reface 
Slotting 

2 Rongh 
Finished Cut 


210-1 

475-10 

213-6 

461-10 

476-10 

69-10 
31^10 


350 
33,937 


54 
352 
65 
59 
311 
400 
702 
460 


350 
200 
215 
280 
206 
290 

235 


404 
552 
280 
339 
517 
690 
702 
695 


200 
215 
280 
206 
290 

235 
200 


3 


204 
337 

133 
227 
690 
464 
495 


200 
















1372 


2550 


30,015 



Form NMl. Daily Record op Work in Process. 



From these dafly records of product and from the pay roll per piece for each operation, as shown in the Comparative 
monthly summaries are made showing the direct-labor cost Cost Record Card on the next page. 

99 ' :-_- 



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100 



BOOKKEEPING AND COST ACCOUNTING 



Monthly Comparative Cost Record Card 

B-1786 5/8 Bodies Month Ending 4/30/15 



Labor Report of Pay Roll for Week Ending 1916 

SCPERINTENDBNCE TRAFFIC 





Pieces 


Operator 


Time 


Rate 


Total 


Cost 


Operation 


Finished 








Cost 


Each 


DriU Center 














Hole 


4092 


204 


24 H 


.24H 


$5.94 


.001 


Edge and Fac< 


3643 


16 


147 


.24J^ 


36.02 


.009 




3789 


149 


29 


.I6H 






Chamfering 




284 


6h 


.25 






Chamfering 




459 


27 


.I6H 


10.79 


.002 


First Rough 


4077 


459 


161 h 


.16H 






First Rough 




149 


3 


.I6M 


27.14 


.006 


Refacing 


4095 


532 


217 


.23 


49.91 


.012 


Slotting 


4547 


367 


92 H 


.19 


17.58 


.003 . 


Second Rough 


2986 


50S 


128 


• 2\H 


39.15 


.013 


Finish Cut 


2953 


26 


137 


.25 






Finish Cut 


2953 


506 


10 


.2\H 


36.43 


.012 


• 




983 


$222.00 


$222.96 


$.058 



Form NM2. 



A perpetual inventory of rough and of finished parts is 
kept on 8 X 5-inch Cards. 



Part No. B. 1786 
Finished 



Bodies Size H in. 

ROUOH 



Date 


Rec'd 


Del'd 


On Hand 


Date 


Rec'd 


Del'd 


On Hand 


1915 








1915 








n/20 


Forward 


6605 


11/20 


Fori 


nrard 


1913 






29 


6576 


11/23 




337 


1576 


n/22 


202 


52 


6778 
6726 


11/24 




350 


1226 


11/24 


200 


103 


7072 
6969 











Form NM3 



Monthly reports of each class of product are made on a form 
printed as follows on typewriter sheets 8}X13 inches, two 
forms to a sheet. 



Report of H Type K. 


AMD Parts From 11/27 


to 12/31/16 




Cylinders 


Heads 


Pistons 


Bases 


Covers 




Bottom 


Top 








Symbol 


B1786 


S4508 






B1907 


3/48 


B1908 



Form NM4. 

The side headings are " Rough Stock," On Hand, Balance 
Forward; " Received "; " Delivered "; " Defective Parts "; 
^' Bal. Rough Stock on Hand "; and these headings are 
repeated for "Stock in Process," and "Finished Stock," 
and lines are also given for total stock on hand, and for total 
output and distribution from the beginning of the year to 
date for each of the parts of the machine and for the com- 
pleted machine. 

A weekly Labor Report is made on two typewritten sheets 
in tlie following form : 



Departments 


Employees and 
Maintenance 


Pro- 
duction 


Totals 


Miscellaneous: 

Shipping and Trucking 

Cost Dept. 

Meter Stock Room 

Engineer and Producer- 
man 

Electrician and Helper 

Fireman 

Stenographer and Office 
Boy 

Watchmen (night) 


8 
6 
2 

2 

2 
1 

2 
2 

6 

18 
9 

5 

1 

2 
42 

20 
3 

I 
5 

13 

4 


162 60 
123.37 
36.45 

61.50 
57.60 
20.25 

25.05 
45.75 




532.57 


Drafting 


78.90 
26.62 




78.90 


Repair — Foreman 

Bench and Machine Hands 


290.32 


316.94 


Cap. Dept. 




104.70 


104.70 


Japanning and Tinning 




93.37 


93.37 


Mr. Brown — Foreman 
Helpers (sweepers) 
Bench and Machine Hands 


43.50 
24.75 


754.27 


822.52 


(Followed by the figures 
for other foiemen and 
their bench and machine 
hands.) 

Toolmakers. etc. 
Press Hands 


44.50 
301.17 


3.50 
182.08 
55.87 


587.12 


Mr. SmiiA— Foreman 
Patternmakers 


35.10 
134.43 




169.53 


MiUwrighta: 
Millwrights, etc. 
Elevator Operators 


204.48 
39.52 


1.47 


245.47 


Machine Dept. A. Totals 











A similar list is made out for Dept. B and for the Foundry. 
From the report from which the above figures were taken it 
appears that of the total labor cost the proportion for super- 
intendence traffic and maintenance was 34 per cent in Dept. 
A, 23 per cent in Dept. B, and 7 per cent in the Foundry. 

In this factory the costs of the individual articles made are 
reported only for material and for labor directly engaged in 
production. The apportionment of the costs for superin- 
tendence, traffic and maintenance, and for other items of 
burden or overhead, to the different products is left to the 
general oflBce. 

WEEKLY AND MONTHLY COST PERIODS 

The fact that in our yearly calendar the lengths of the 
months vary is the occasion of some difficulty to cost account- 
ants. Pay rolls are usually made for a week's time, while 
bills for goods purchased are either rendered monthly or else 
monthly statements are made out giving the totals of the bills 
of goods purchased during the month. Salaries are also 
commonly paid in monthly instalments. It is convenient for 



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DAILY AND MONTHLY RECORDS. CHARTING OF STATISTICS. COST OF IDLENESS 



101 



statistical purposes to compare the cost and output figures of 
one month in the year with those of other months or with 
those of the corresponding month in the previous year, but a 
calendar month may contain four full-week pay-roll periods, 
or four weeks plus from 1 to 3 days, or three or four full 
weeks plus one or more days at the beginning of the month 
and other days at the end. If the pay-roll week ends on 
Saturday night the calendar month may cover parts of six 
pay rolls, for example, in July, 1916, which began on Satur- 
day it would include one day, July 1, four full weeks, July 
2-29, inclusive, and two days July 30 and 31. 
There are several ways of minimizing the difficulty: 

1. The pay roll may be made out for calendar months, and 
all statistics kept by these months. The total output of 
product (tons, yards, etc.), or the total cost of this product 
may be divided by the number of days in the month to obtain 
average daily product or the average daily cost. 

2. The pay rolls may be for weeks while the statistics may 
be for months, the pay-roll figures for the odd days outside of 
the three or four full weeks being computed separately and 
added to the figures of the full weeks in order to obtain the 
monthly labor costs. 

3. The pay rolls may be weekly and the expense or burden 
charges and the statistics for calendar months, some months 
including four pay rolls and some five; and, in case the year 
does not begin the same day that the weekly pay roll begins, 
the labor costs of the months of January and December 
would include four weekly pay rolls plus portions of the pay 
rolls at the beginning or end of the year or both. 

4. The year, for statistical purposes may be divided into 
four thirteen-week periods, the first day of the first pay-roll 
week being the first day of January. In this way the pay- 
roll week would begin on a different day in different years. 

5. In like manner, the year may be divided into thirteen 
four-week periods. 

6. The pay-roll period may be a " pay-roll week" made by 
dividing the calendar month into four parts as nearly equal 
as possible. In some large works these " weeks " end on the 
8th, loth and 22d, and on the 28th to the 31st of the month, 
according to number of da3rs in the month. Thus, the first 
period would be of eight days of which either one or two would 
be Sunday, the second and third periods would be each seven 
daj's, including one Sunday, and the fourth period would, in 
January, be of nine days with one or two Sundays, and in 
February of a year not a leap year, only six days, one of 
which might be a Sunday. 

The third of the above-described methods is probably the 
most conmion. It has the disadvantage, for statistical pur- 
poses, of showing the monthly output and monthly labor cost 
to be sometimes for four weeks and sometimes for five, and 
of inaccuracy in the monthly distribution of burden, the 
charges to burden account being in some cases (indirect labor), 
for foiu- or five weeks, and in others (salaries supplies and 
work by outside parties), for the calendar month, while the 
credits (work in process and finished product) are for four or 
five weeks. 

The following is an example of accounting by this 
method: 



Memoranda from which Journal-Ledger Entries are Made 



Charge 


Credit 


Amount 


^ 


Stores 

Work in 
Process 

Work in 
Process 

Burden 

Burden 
Burden 


To Company 

To Labor 

To Stores 

To Labor 

To Stoies 
To Company 


$2500 

2500 

800 

1800 

300 
300 


For materials purchased durinx the 
month, the bills being certified 
to Company for payment, as 
per Invoice Register. 

Direct labor, as per job tickets and 
pay roUs for 4 weeks ending 
Jan. 28. 

Material delivered to shop, charged 
on job tickets or stores Issue 
cards, for 4 weeks. 

$1200 indirect labor, from pay roll 
for 4 weeks; $600 salaries for 
month. 

Supplies for power plant and shop, 
for month. 

For repair work done on plant by 
plumbers, etc., as per their 
monthly bills certified for pay- 
ment, $200. 

For charges from Company's books, 
monthly proportion of taxes, 
insurances, depreciation, water 
rent, etc., $100. 


Finished Product 
To Work in Piocess 

To Labor 

To Stores 

To Burden 

Work in Process: 

To Burden 

Company to Finiahed Product 

Labor to Company 


2800 
100] 
100 

looJ 

2100 
2000 
4200 


For goods transferred from shop to 
warehouse, for month 

Packing and shipping, as per job 
tickets, for 4 weeks 

For burden charged on job tickets 
for work done in shop, 4 weeks. 

For Goods shipped, at factory cost, 
du ing month. 

For payments on account of pay 
rolls 





Journal-Ledger. 


January 










Credit Accounts 




Charge 


Com- 
pany 


Stores 


Labor 


Burden 


Work 

in 
Proc. 


Fin. 
Prod. 


Total 
Dr. 


Stores 

Labor 

Burden 

Work in Process 

Finished Product 

Company 


2500 

4200 

300 


300 
800 
100 


1800 

2500 

100 


2100 
100 


2800 


2000 


2.500 
4,200 
2.400 
5.400 
3,100 
2,000 


Total Cr. 


7000 


1200 


4400 


2200 


2800 


2000 


19,600 





Totals and Balances 








Dr. 


Cr. 


Dr. 


Cr, 


Stores 

Labor 

Burden 

Work in Process 

Finished Product 

Company 


2,500 
4.200 
2,400 
5,400 
3.100 
2.000 


1.200 
4.400 
2,200 
2,800 
2,000 
7,000 


1300 

200 
2600 
1100 


200 
5000 




19,600 


19.600 




5200 


5200 



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102 



BOOKKEEPING AND COST ACCOUNTING 



All of the accounts in the above balance sheet represent 
assets except the $5000 liability of the factory to the Com- 
pany, the $200 liability to Labor (wages unpaid), and the 
$200 debit to Burden account, which represents undistributed 
burden. Part of this amount is due to the fact that some of 
the debits to this account are for the whole month while all 
of the credits are only for four weeks, and in other months 
when the credits are for five weeks the debit balance may be 
canceled and a credit balance take its place. If the burden 
had been computed for the extra days beyond the four weeks 
the account might have been debited, say $200 more for 
Labor and credited say $300 more by Work in Process, which 
would have reduced the debit balance to $100. At the end 
of the year or fiscal period it is necessary to make the entries 
for the days of the month that may remain beyond the end 
of the pay-roll week, so that Burden account may be balanced 
properly and the balance, debit or credit as the case may be, 
closed into Profit and Loss. 

The sixth method, that of dividing each month into four 
pay-roll periods, ending on the 8th, 15th, 22d, and 28th to 



31st, is probably the most satisfactory for cost accounting, 
as it enables all the debits and credits of Burden to be made 
for the full month, and avoids the trouble of making com- 
putations for the extra days beyond the weekly periods. 

The Cost Period. It is advisable to have the cost period coin- 
cide with the pay roll periods as far as practicable, so that the 
closing days will agree. That is if the men are paid by the week 
the cost period may be four or five weeks. In this way calcu- 
lations of wages not yet paid will be avoided and the distribution 
of costs simplified. — Nicholson. 

MONTHLY RECORD OF PROGRESS IN A FACTORY 

The monthly progress of the business is not shown by the 
monthly totals of the entries charging and crediting Stores 
or Work in Process, since many of these entries represent 
mere changes in location of material, but only by the credits 
of Labor and Burden accounts charged to Work in Process 
and by the record of man-hours worked per month. This is 
illustrated by the following table of four months' entries to 
the principal factory accounts. 



Credit Accounts 



Charge Accounts 




Accounts 
Payable 


Labor 


Burden 


Stores 


Work in 
Process 


Warehouse 


Total 
Dr. 


Stores 


Dr. Jan. 
Feb. 
Mar. 
Apr. 


1.000 
5,000 
2.000 
2.000 








3.000 
1,000 
1.000 
4,000 




4,000 
6.000 
3,000 
6,000 


Burden 


Dr. Jan. 


1,000 


2,000 




1,500 






4.500 




Feb. 


500 


2,000 




1.500 






4.000 




Mar. 


500 


2,000 




1.500 






4,000 




Apr. 


500 


2,000 




1,500 






4.000 


Work in Process 


Dr. Jan. 




3,000 


3.500 


5.000 






11.500 




Feb. 




3.500 


4.000 


2,000 






9,500 




Mar. 




4,000 


4,500 


4,000 






12.500 




Apr. 




4,000 


4.500 


3,000 






11.500 


WarehoiMD 


Dr. Jan. 
Feb 
Mar. 
. Apr. 










5,000 
10.000 
8.000 
9,000 




5.000 
10.000 
8.000 
9,000 


Salea 


Dr. Jan. 
Feb. 
Mar. 
Apr. 












4,000 
9,000 
10,000 
12,000 


4,000 
9,000 
10.000 
12.000 


Total CrediU 


12.500 


22,500 


16,500 


20.000 


41,000 


35,000 


147,500 



The sum of Labor and Burden charged to Work in Process 
is for the four successive months S6500, ' S7500, S8500, 
S8500. This is a better record of the progress of the business 
than is given by any of the other accounts, all of which show 
great fluctuations on account of movements of material and 
changes of balances, which do not represent quantity of work 
done. The difference between the charges and credits of 
Burden account is a most important index of factory condi- 
tions, the charges showing the monthly cost of burden and 
the credits the amounts of normal burden charged, on the 
machine-hour rate basis, to the cost of product. The dif- 
ference between the two represents the unearned or over- 



earned biurden, as the case may be. The former indicates 
factory losses due to idle machinery; the latter factory gains 
on account of machinery being fairly well employed. The dif- 
ference for the four months, according to the above table are 
as follows: 





Jan. 


Feb. 


Mar. 


April 


Total 


Burden Acct. 

Gain, plus, or 
Loss, minus 


Dr. 
Cr. 


4500 
3500 

-1000 


4000 
4000 




4000 
4500 

+ 500 


4000 
4500 

+ 500 


$16,500 
16.500 





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DAILY AND MONTHLY RECORDS. CHARTING OF STATISTICS. COST OF IDLENESS 



103 



Here is a way of tabulating the totals of the Journal- 
Ledger so as to show balances, and also transactions with 
Company Account, Company being credited with the bal- 



ance of stores of all kinds, also with payments of Labor and 
Accounts Payable, and charged with shipments from ware- 
house: 



Factory Accounts 





Balance 


Jan. 


Feb. 


Mar. 


Apr. 


Total 


Dr. 




Jan. 1 










4 Months 


Balance 


{^: 


44,000 


4.000 
6,500 


6.000 
3.500 


3,000 
3.500 


6.000 
4,500 


19.000 
20,000 


43,000 


(S: 




4.500 
3,500 


4.000 
4.000 


4.000 
4.500 


4,000 
4,500 


16.500 
16.500 




Work ia Prooeas [ ^^' 


35.000 


11.500 
6.000 


9.500 
11.000 


12.500 
9,000 


11.500 
13.000 


45.000 
41.000 


39.0UU 


«r . /Dr. 
Warehouae {^^ 


39.000 


5,000 
4.000 


10.000 
9,000 


8.000 
10.000 


9.000 
12.000 


32.000 
35.000 


36.000 


Company Cr. 


lia.000 






1 
Company Ct. 


118.000 



The " Total 4 mos," column may be omitted, and balance 
columns may be inserted after each month's coliunn instead, 
if it is desired to show the balances of the several accounts 
each month. 

Company Accounts 







Jan. 


Feb. 


Mar. 


Apr. 


4 moB. 


Labor 
Accta. Pay. 


Cr. Co. 
Cr. Co. 

Co. Dr. 


5000 
2000 


5,500 
5.500 


6.000 
2,500 


6.000 
2,500 


22,500 
12.500 


Sales 


7000 
4000 


11.000 
9.000 


8.500 
10,000 


8,500 
12.000 


35.000 
35.000 



THE CHARTING OF COSTS. THE EXCEPTION 
PRINCIPLE 

One of the results of a good costing and accounting system 
is a series of statistical tables for the use of the executives. 
The study of these tables leads to better planning of factory 
policies. But tables of figures are dreary things; they are 
often difficult to interpret, and haste in interpreting them is 
apt to lead to wrong conclusions. Important statistical 
tables should be diagrammed on cross-section paper or 



" charted." The cost system, with its accompanying charts 
should determine and show the following. (F. B. Gilbreth, 
Jour. A. S. M. E. April, 1917.) 

1. What the quantities of individual outputs should be 
(prophecies of outputs). 

2. Prompt records of individual outputs. 

3. What the costs should be (prophecies of costs). 

4. Prompt records of costs. 

5. Causes of fluctuations and deviations of outputs and 
costs from prophesied outputs and costs. 

Mr. Gilbreth emphasizes the value of "the exception prin- 
ciple" in connection with the executives' study of charts. 
He says: 

No executive should make a routine motion of handling, turn- 
ing over or examining charts containing data, either normal, or 
with considerable deviation from normal, where the causes of 
the deviation can be handled properly by those in lower execu- 
tive positions. The exclusion of such cases can be obtained 
by having the executive determine zones on the charts, it being 
understood that as long as the points fall within the zone he is 
not to see the charts unless he specially requests to see them. 

This is the " exception principle," that the chief executive 
should concern himself only with exceptional matters, that 
are outside of the zones of normal, everyday work. 



DIAGRAM OF THE ACCOUNTING SYSTEM 
Company's Books, Accounts Relating to Factory 



A 


B 




C 




Permanent Investment Account* 


Expense Accounts 


Manufacturing and Factory Operating Account 


Balance 


Land 


Taxes Paid 


Dr. 


Cr. 


The balance of Manufao- 


Buildings and Fixtures 


Insurance Paid 


To Cash, for Pay Roll and 


Factory Cost of Goods 


turing Account includes 


Machinery and Equipment 


Reserve for Depreciation 


Petty Cash 


shipped from factory 


the current assets of the 




Administrative Expense 


To Accounts Payable, for 


Factory Losses assumed by 


factory, vii: 






purchases on factory ac- 


Company and not charged 


Stores 






count 
To Expense, A of B each 


to cost of product, such 


Work in Process 










as unearned burden, de- 


Fmished Goods in Waro- 


Dr. 


Cr. 


Dr. 


Cr. 


month 


preciation of assets 


house 


For Cost or Ap- 


By Proceeds 


For Actual Ex- 


By Factory 


To Factory, gains on over- 






praised Value 


of Sales 


penditure 


Operating 


earned burden, or appre- 






and Cost of 


By deprecia- 




Acct. each 


ciation of assets 






Betterments 


tion. 

(Ch«. Res. 
for Depn.) 




month— ifV 
of annual 
exoensc 









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104 



BOOKKEEPING AND COST ACCOUNTING 

Factobt Books 



Company Account 


Stores 


Labor 


Burden 


Work in Process 


Warehouse 




Dr. 


Dr. 


Dr. 


Dr. 


Dr. 


This account is the reverse 


For Cost, including 


For payments of wages, 


For all indirect expend- 


For Direct Labor, and 


For Factory Cost of 


of Account C above 


freight and other ex- 


salaries, etc. 


itiires, cash, labor or 


Direct Material from 


goods made and for 


Cr. Company for Cash 


pense of all materials 




supplies that cannot 


stores, and for bur- 


expenses of warehouse 


and materials received, 


and supplies received 




be charged directly to 


den charged to cost of 




and for Expense charged 






cost of product 


work 




by Company 






















Debit for goods shipped, 


Cr. 


Cr. 


Cr. 


Cr. 


Cr. 


and for other values 


For all material used 


Credits of labor on pay 


By the several alloca- 


By Factory Cost of goods 


By Factory Cost (includ- 


charged to Company 


by the factory and 


rolls and salary lists 


tions of burden to Cost 


put in Warehouse, and 


ing expense) of goods 




charged to Work in 






by betterment work 


shipped on Company's 




Process or Burden 






charged to Company 


account 




Accounts 











Diagram of Annual Exhibit 

The accompanying diagram, Fig. 2, shows a useful 

method of presenting the relative volume of business done 

in different classes of product, with the cost of material, 

labor, burden and selling expense, and the profit on each, 



both in dollars and in percentages. Horizontal distances 
are made proportional to the percentages of volume of 
business and vertical distances to percentages of factory 
cost; areas are proportional to the several items of expend- 
iture and profit. 



AB C D £ 

2 2 4 6 8 



Classes cf Product 
F G H I 

Volume of Business, per cent of Total Factory Cost 

10 14 16 18 



J 

20 



Totftl=100 

Material 

17,200 



10 
20 

ao 

40 
'8 60 

a"" 

.0 80 

S 90 

^100 

.110 

8120 

S130 

^ 140 

150 

160 

170 

180 



t 



1,200 



2,100 



2,700 



t200 



4,400 



2,400 



LOOO 



5,000 



4,000 



Material 

2.100 



Labor 

4,900 



Burden 
7,000 

Factory Cost= 



1.600 



8,000 



6,400 
100 per cent 



2,700 



8,100 



7,200 



5,000 



8,000 



7,000 



Labor 

43,300 



Burden 

39,500 



oS ^ 



6,000 
2,700 



8,000 
2,800 



10,000 
4,500 



14,000 

Cost of 
4,900 



Sellinflr 



16,000 
8,800 



18,0o0 
7,200 



1,200 



Profit 

2,000 



2,100 



2,500 



21,000 



2,700 



§ 9,900 



12,800 



1,600 



27,900 



32 S 1^1 ^« 

SS8 8 20 25 



17,000 



117 



25 



26,400 



SelUns Price 

Profit per cent of Selling Price 
lao 6.1 9.7 

Profit per cent of Factory Cost 

15 10 15 



20,000 
10,000 



Profit 

5,000 



35,000 

14.3 
25 



Fig. 2. — Diagram op Volume op Business, Costs and Profits. 



100,000 

Cost of Selling 

44,400 



Profits 

19.000 



163,400 

11.6 

19 



The value of such a dia^am depends entirely upon the 
use that is made of it. The cost system is complete without 
it, and it is of no benefit to the management unless it is 
studied and acted upon. A progressive manager on receiv- 
ing such a diagram from the chief accountant would probably 
at once notice that Class H showed a profit of only S1600 
out of the total profits of $19,000, and that the profit was 
only 10 per cent of the factory cost and 6.1 per cent of the 
selling price. He would then start an investigation as to 
what might be done in order to insure that a better showing 



might be made in the following year. The investigation 
would include a study of the possible results of several 
actions that might be taken, viz. : advance of prices, lowering 
of costs of selling, burden, labor, material. He would then 
notice that Classes A, B and C showed profits respectively 
of only $700, $400 and $800, due not to low percentages of 
profits but to small volume of business, and might then 
take steps to increase the sales of these classes. 

Cost accounts are of little value if they do not lead to 
action. 



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DAILY AND MONTHLY RECORDS. CHARTING OF STATISTICS. COST OF IDLENESS 



105 



IDLENESS CHARTS* 

There are many methods of cost accounting; but there are 
only two leading theories as to what cost consists of. They are: 

Firstf that the cost of an article must include all of the expense 
incurred in producing it, whether such expense actually con- 
tributed to the desired end or not. 

Second, that the cost of an article should include only those 
expenses actually needed for its production, and any other 
expenses incurred by the producers for any reason whatever 
must be charged to some other account. 

The first theory would charge the expense of maintaining in 
idleness that portion of a plant which was not in use to the cost of 
the product made in that portion of the plant which was in opera- 



tion; while the second theory would demand that such expense be 
a deduction from profits. When plants are operated at their 
fuD capacity, both theories give the same cost. When, however, 
they are operated at less than their full capacity, the expense of 
canying the idle machinery is, under the first theory, included 
in the cost of the product, making the cost greater; while under 
the second theory, this expense of idle machinery is carried in a 
separate account and deducted from the profits, leaving the cost 
constant. When costs are figured on the second basisj great actufity 
immediately ensues to determine why machinery is idlCj and to see 
what can he done to put it in operation. It is realized at once that 
this machinery had better be operated, even if no profits are 
obtained from its operation and only the expense, or even part 
of the expense, of maintaining that machinery is earned. 



















MILL,_ 


Textile 
















June, iQift 


Symbol 


Mach. Clua 


)( Of Capacity uMd on -^£7 Turn 

10 80 80 40 60 CO 70 80 90 


Total 

Expense of 

Idleocaa 


- Details of Idleness Expense Dm to 


Remarks 


Lack of 
Work 


Lack Of 
Help 


Lack Of 
and Poor 
Material 


Repahs 


Poor 
Planninc 




Spinninff 


i 










18 


70 


18 


70 




















y^y^////^'^^^'^ 


m 


sa 




Winding 












118 


74 






103 


74 






16 


00 








' w^-jm y///m w 


d_ 




DoabUnc 












10 


01 


10 


61 




















v/A^////'y/Ay///VA 




TwiaUuff 












17 


96 


17 


96 




















'ay//////////^////////i 




Qallllnr 




W 








SO 


67 


10 


67 


10 


00 
















^^^^^^ 




'A 




Warplnj 












SW 


76 






















Laek of WoQDd Yarn 




y///////, wm v//. 'A 


390; 78 




Weaving 












015 


26 


76 


00 






8(0 


26 










Lack of Warps 




yyi^ly/Avz/.y/Ay/Z/A 




Flnbbinff 












210 


72 










210 


72 










Laok of Woven Gtoods 




yAy'y/}/fr,\Y//^y////A 


1 InspMtinff 








_ 




49 


70 






10 


70 


SO 


00 










Lack of Woven Goods 


yy wyf'ayyMY>yy/ 


^ 




SblppiDff 












21C 


17 


60 


00 






160 


17 










Lack of Woven Oocds 


' mLZzyzzymi22i 












































ToUl 












19GV 


28 


198 


93 


124 


44 


1630 


89 


15 


00 








w/yyyyyyyy/yyyyyyyyyA 


















































— 1 




— 1 




L 




. 








. 


> 











' 




' 




v~;^ 




— 




— 


"~~" 


— 






















Approved by 








_ 














J 
























Supt. 


Fattnt A 


li!p/f«l For 













































FiQ. 3. — Gantt'b Idleness Chart. 



Fig. 2 illustrates this subject most clearly. Charts of this 
nature, which are being made monthly in several large plants, 
have already had a very educational influence on the managers 
of those plants. They show that idle machinery which cannot 
be used should be disposed of, and the money received, and the 
space occupied, put to some useful purpose. 

If now the cause for idleness is ascertained each day we can 
find the expense of each cause of idleness as shown on the chart. 
That part which is due to lack of orders points out that our selling 
policy is wrong, or that the plant is larger than it should be — in 
other words that somebody in building the plant has over- 
estimated the demand. It is clear, however, that no conclusion 
should be based on the figures for one month, but on the results 
for a series of months during which the problem has been carefully 
studied. 

Expense due to lack of help means that we must investigate 
the labor policy. 

Expense due to lack of, or poor material, is an indication of 
the efficiency of the purchasing policy and storekeeping system. 

If in any case the expense of idleness is greater than can be 
attributed to all of these causes together, it must go in the last 
column as poor planning. t 

♦ Extract from a paper by H. L. Gantt, on "Productive Capacity a 
Measure of Value of Industrial Property." Tram. A.S.M.E., 1916. 

t It may be due to panic or general business depression, something 
for which the owners of the concern are not responsible. It may also 
be due to permanent decrease of demand for the product caused by 
competition of other products, as in the cases of automobiles replacing 
horae-drawn vehicles, and of steam turbines replacing reciprocating 
engines. — ^W. K. 



Mr. Gantt is undoubtedly correct in favoring the second 
one of the two theories as to what cost consists of, but some 
question may be raised as to what are " the expenses actually 
needed for the production of the article," and, whether, 
under some conditions, it is not right to charge some of the 
cost of idle machinery to the cost of an article. It may be 
that the nearest approximation to true costs will be found 
in a compromise between the two theories. In many lines 
of business it is not the cost of a certain article tEat has to be 
determined or estimated, but that of hundreds or thousands 
of different kinds of articles, finished and unfinished, in order 
to obtain reasonably correct inventory valuations and profit 
and loss estimates. In that case it is impossible that every 
department and every machine can be run every day at its 
full capacity, or that the machine equipment can be so nicely 
apportioned to the orders on hand that no machines are ever 
idle. In the textile mill, the idleness chart of which is shown, 
it may be possible, if the mill is a large one and makes only one 
style of goods, so to balance the machinery that none of it is 
idle more than say 10 per cent of the time, but, if many dif- 
ferent styles are made, the demand for which varies with 
the season and with the fashion, the weaving machines 
may be running full time and not be able to take the 
whole capacity of the spinning machines, some of which 
would, therefore, have to be idle part of the time; and it 



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106 



BOOKKEEPING AND COST ACCOUNTING 



may not be possible to utilize the full capacity of the 
inspectmg and finishing departments. 

The " expense actually needed " for the production of a 
variety of articles may thus includCi at least, part of the idle 
time of some machines which must be kept in the factory to 
meet a varying demand, but which cannot be kept contin- 
uously employed, and in such a case it is right to charge some 
of the cost of idleness into the " normal burden " which is 
distributed in the machine-hour rate to the cost of the goods. 
The machine-hour rate should be figured once a year, after 
studjdng the statistics of preceding years, for each machine, 
and it should include an allowance for the average or normal 
time that the machine may be expected to be idle during the 
coming year. If the actual idleness time in the ensuing year 
is greater than the amount estimated, the excess should not 
be apportioned to the cost of goods in any one month, or in a 
year, but should be charged to profit and loss, either directly 
or through a subordinate account, such as " Loss due to 
Idleness of Plant." 

A modification of Mr. Gantt's idleness chart is thus sug« 
gested in order to show how much of the idleness of a machine 
or department is normal and necessary to the conduct of the 
business, and how much is abnormal or excessive. This 
may be made by drawing vertical lines on the chart indicating 
the normal percentage of full capacity which each machine 
or department is expected to run during a month of good 
business. In the chart shown. Fig. 3, doubling might have 
such a line at 70 per cent and twisting at 75 per cent, showing 
the excess idleness of doubling to be 22 per cent as compared 
with 52 per cent total idleness, and the excess idleness of 
twisting 22 per cent as compared with the 47 per cent shown 
on the chart. 

The most important function of Mr. Gantt's idleness chart 
is not that it is a historical record of what happened during 
the past month, not a mere statement of what was the cost of 
idleness in that and in preceding months: it is that it is an 
exhibit of inefficiency which will stimulate the managers 
of the business to action. It leads to investigation of 
the causes of idleness and to the finding of methods to 
remedy it. 



IRON WORKS STATISTICS-GRAPHICAL PRESENTATION 

The accompanying table and chart, Fig. 4, taken from a 
paper on "A Decade of Progress in Reducing Costs," by 




Fig. 4. — Ieon Works Statistics. 
Chas. Kirchhoff (Trans. Am. Inst. Mining Engrs., 1899), 
show the relative percentages of the several items entering 
into the cost of a ton of pig iron, taking the costs in the year 
1899, a year of high profits, at 100 per cent. The method of 
presentation is one that may be found useful in many indus- 
tries. The chart, which is made by plotting the figures of 
the table, shows the fluctuations and general tendencies of 
costs much more clearly than do the figures themselves 



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DAILY AND MONTHLY RECORDS. CHARTING OF STATISTICS. COST OF IDLENESS 



107 



FiouBK Fluctuations in Coat or Pboductxon or Pig Ibon. — Socthbrn Flaiit 
Comparative SUtemmt of Pi«-Iron Coeta for the Year 1839 to 1896, both Inclaaive, with the Ficures of 1889 Uken aa a Unit Basis 





Product 


Coke Con- 


Ore Cost, 


Limestone 


Coke Cost, 


Labor Cost. 


Cost of 


Cost of 


Total Cost, 


Averace 


Net 


Year 


per Day, 


sumption 


Per Cent 


Cost, 


Per Cent 


Per Cent 


Arbitraries, 


Sundries, 


Per Cent 


Selling 


Average 




Tom. 


per Ton Iron 




Per Cent 






Per Cent 


Per Cent 




Prices, 


Profit 




Per Cent 


Per Cent 
















Per Cent 


Per Cent 


1889 


100 


100 


100 


100 


100 


100 


100 


100 


100 


100 


100 


1890 


94.1 


99.4 


107.6 


87.6 


99.4 


112.8 


103.3 


105.8 


104.3 


103 


95.1 


1891 


101 


102.3 


98.2 


97.6 


102.8 


81.8 


103.3 


99.6 


97.1 


94.6 


79.7 


1892 


98.1 


100.6 


104.5 


53.7 


100.8 


70,2 


106.6 


112.2 


95.1 


87.1 


38.7 


1893 


120.6 


94.7 


105.8 


67.1 


94.6 


60.5 


100 


90.8 


89.6 


76.9 


00 


1894 


166.7 


91.2 


85.4 


54.7 


72.6 


44.6 


88.3 


70.1 


69.7 


65 


36.5 


1895 


155.7 


91.2 


76.6 


81.2 


74.5 


55.3 


95.6 


47.1 


69.8 


64.9 


35.7 


1896 


164.4 


101.2 


78 


41.6 


70.6 


50.9 


127 


42.1 


67 


64.6 


50.8 


1897 


184.3 


84.1 


78.4 


24.5 


64.8 


50.2 


116.6 


37.4 


63.2 


59.5 


37.5 


1898 


167.7 


91.2 


79 


40.3 


64.1 


51.9 


113.3 


33.4 


63.4 


61.2 


47.9 



Memoranda. — Arbitraries oover relining charge, general office expense, taxes and insurance. Sundries cover sand, brass and iron castings, coal to locomotive 
and encines and boilers and pumps, and small tools and furnace supplies. 



U70 71 72 73 7i 75 76 77 78 79 M 81 « 8S 84 86 | 


N 


































































s» 


-A 




























46 


V 




i 


























44 
42 

40 
38 
86 

31 
SS 

3« 

2S 
M 
14 

a 
20 

18 
16 
14 
12 
10 

8 
6 

4 

_1 






\ 






























\ 


























, 




\ 






























\ 






























B 






















































































r» 










s. 




















\y 




s»^ 




V, 


\ 


V 






















^ 








\ 
























\ 






X 


s. 






















\ 








\ 
























X 






\ 



























\ 






V 








N. 










D 


V J 




\ 






\ 




















.x^ 




V 




s, 


> 














c-S 






/ 


s. 


\, 






s 


N 












^ — 


^ 


^ 




-^ 




^ 


^ 




^ 




... 


^ 


















— 1 


^^ 








^ 


r=! 






= 


1870 71 72 78 74 76 7 


6 7 


7 78 78808182 838486| 



Fig. 6.— Chabt of Labob Cobts. 

Fluctuations in Labor Costs on six oommodities during fifteen yean 
under a contract ami piece-work system. (Henry R. Towne, Trasu. 
A. S. M. E., 1886. From Sng. Mag., April, 1918.) 



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CHAPTER XII 
PROBLEMS AND DIFFICULTIES. STANDARD COST 



ESTIMATES OF COST WHEN THE BY-PRODUCT OR 
SCRAP FROM ONE PRODUCT IS USED IN MAKING 
ANOTHER 

Problem. A boiler and tank manufacturer installs a costly 
punching press to be used in making large disks for boiler 
and tank heads. The material used is steel plate, cut into 
squares, and the waste or scrap is 25 per cent of the original 
material. This waste may be sold in the market for remelt- 
ing; or it may be used as the raw material for small disks or 
washers which are cut in a small press. At what price shall 
the scrap be valued in estimating the cost of the small disks, 
and what is the factory cost or inventory value of the small 
disks, and also of the large disks, (a) when the scrap is sold 
at a low price, (6) when the scrap is utilized in making small 
disks? 

Cost Data, before Installing the Small Press 

Operation. Cutting large steel disks. 

Machine. Heavy punching press — cost, with attachments, 
$2000. 

Material. Steel plates costing 2c. per pound delivered 
at the machine. 

Scrap. 25 per cent of the raw material, sold at 0.8 cents 
per pound. 

Labor. Pressman, 30 cents per hour. Helper, 25 cents 
per hour. 

Product. 20 disks per hour. Average weight of blanks, 
100 pounds. 

Running Time. 600 hours per year, the market for large 
disks being limited. 

Yearly cost for materials: 

600 X20 X 100 - 1,200.000 lbs. @ 2^ $24,000 

Yearly cost for labor: 

600X0.30+600X0.25 330 

Estimated burden: 

Interest, Taxes, Insurance, Depreciation, Repaiis, 

Lubrication of machinery. $2000 ® 15% 300 

Rent of space for machinery and storage, 1000 sq. ft. 

® 20^ per year 200 

Interest on capital invested in material and product 

(6 turnovers a year) $4000 @ 6% 240 

Power, 0.5 H.P. & 4ff per H.P.-houi, 600 hrs. 12 

Superintendence, 10% of labor cost, 33 785 



Credit 300,000 lbs. scrap ^ 0.8^ per lb. 



Total 25.115 
2,400 



Additional Cost after Installing the Small Press 

The small press costs $500. Of the 25 pounds scrap left 
after making each large disk, 60 per cent, or 15 pounds is 
made into small disks, and 40 per cent, or 10 pounds is scrap 
sold at 0.8 cents per lb. The machine occupies a comer of 
the room in which the large machine is located, it requires 
no extra superintendence, and no extra investment of capital. 
The extra costs are: 



Labor, one man 1200 hiS. per year, @ 30f( 
Buiden: Int. Depn. etc., on machine $500 ® 15% 
Powet. 0.2 H.P. @ 4^. 1200 hrs. 


75 
9 


00 
60 


360 
84 


00 
60 








444 


60 



If we charge the material at the scrap value 



300.000 lbs. ® 0.8 

Less 120.000 lbs. sold scrap & 0.8 


2400 
960 




1440 


00 


Making total extra cost for making 180,000 
lbs. small disks 
or 1.047 per lb. 






1884 


60 



Estimated cost of small disks made from new material: 



Material: 240.000 lbs. @ 2^ 


4800 


00 






Less scrap 25%. 60,000 @ 0.8^ 


480 


00 


4320 


00 


Labor, 1200 hrs. ^ 30^ 






360 


00 


Burden: Int., Depn., etc., on machinery, 500 @ 


4880 


60 


15% 


75 


00 






Power, 0.2 H.P. @ 4f* per H.P.-hr.. (1200 hrs.) 


9 


60 






Superintendence (part of cost charged large disks) 


• 18 


00 






Rent, 250 sq. ft. ® 20ff per year. 


50 


00 






Interest on capital, $4800 4-6 » $800 ® 6% 


48 


00 








200 


60 




Cost of 180.000 lbs. disks @ 2. 711 per lb., total 






4880 


60 



Cost of 900.000 lbs. of disks, average 2.524^ per lb. $22,71 5 



Revised Estimate of Cost of Large Disks 

Charging the small disks with part of the burden of the 
large disks as in the above table involves a modification of the 
cost estimate of the large disks as below. If we charge the 
small disks and credit the large disks with the scrap at a 
price which will make it equivalent to that of raw material, 
making the net cost of material for the small disks $4320 
after deducting $960 for 120,000 pounds scrap sold at 0.8 cent, 
this charge and credit will be 4320+960=5280, or 1.76 per 
pound. The revised estimate for the large disks then becomes 



108 



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PROBLEMS AND DIFFICULTIES. STANDARD COST 



109 



Material, 1 ,200.000 lbs. @ H 


240.000 




Leas 300.000 lbs. scrap @ 1 . 76 


5.280 


18.720 


Labor aa before 




330 


Burden. Intereat, Depreciation, etc.. as before 


300 




Rent. 750 aq. ft. ^ 20fi 


150 




Ijtereat on capital 240—48 


192 




Power 


12 




Superintendence 33—18 


15 


669 






19.719 


Total 900.000 lbs. @ 2.l91f( p«>r 1*^. 







Summary 

(1) Cost of 900,000 pounds large disks, material cost 
2 cents per pound, and 300,000 pounds scrap sold at 0.8 per 
pound, total cost $22,715=2.524 per pound. 

(2) If the scrap is credited at 1.76 cents per pound, the 
price charged to the small disks, and a portion of the burden 
is also charged to the small disks, total cost S19,719= 2.191 
cents per pound. 

(3) Cost of 180,000 pounds small disks made from 240,000 
pounds new material at 2 cents per pound, 60,000 pounds 
scrap sold at 0.8 cents; or from the 300,000 pounds scrap 
from the large disks, charged at 1.76 per pound, and crediting 
120,000 pounds scrap sold at 0.8 cents, the small disks being 
charged with their share of the burden of the department, 
$4880.60 = 2.711 cents per pound. 

(4) Cost of the small disks if made of scrap charged at 
0.8 cents per pound and with only the extra burden caused 
by making the small disks, leaving the large disks to assume 
all the regular burden of the department as in (1), $1884.60= 
1.047 cents per pound. 



(5) Total cost of 900.000 lbs. large disks 
and 180.000 lbs. small disks 



1,080.000 lbs. average cost 2.278ff per lb. 



22.715 
1.884 



24.599 



60 



19.719 
4.880 



24,599 



00 
60 



60 



Analysis of CosU 


Material 


Burden 


Labor 


Large disks 
SmaU diaks 


21,600 or 18.720 
1.440 or 4.320 


785 or 669 
84.60 or 200.60 


$330 
360 


Total 


23.040 23,040 


869.60 869.60 


690 



Now, which of these figures is the " true " factory cost and 
which should be entered as the inventory value or used as a 
basis for quoting prices? 

The net cost of material, $23,040, is based on the most 
favorable condition of the utilization of scrap, viz.: that all 
the scrap from the large disks was taken for the manufacture 
of the small disks and that none of it had to be sold outside on 
account of deficient demand for the small disks, and that no 
new material needed to be bought for the small disks at 
2 cents per pound on account of the demand for small disks 
being greater. Such a balance between demand and supply 
of scrap of a given quality and shape is exceedingly rare, and 
would not be likely to repeat itself the next year. If all the 
disks were unsold at the time of taking the inventory for the 
purpose of figuring profits and losses, it would be proper to 
value them at the recorded cost, $24,599.60, or 2.278 per 
pound, although it would probably cost more to replace them 



when they were sold; but it would not be safe to use this 
figure as the basis upon which the lowest selling price for 
future contracts should be fixed, for that should take into 
consideration the fact that the recorded cost was probably 
abnormally low on account of the imusually favorable con- 
dition of the balance of supply and demand for scrap. 

Factory costs are needed in order to get approzhnately 
correct inventory values, from which to calctilate profits 
and losses; also in order to have a basis for minimiim 
selling prices; the recorded costs are past history, useful 
to the bookkeeper, to balance his books, but the costs 
that are to be used as a basis for future prices should be 
'* normal costs " or probable future costs, and these may 
differ considerably from the recorded costs. 

The case becomes much more complicated when the product 
is of two or more classes, as in the case of the disks, and when, 
in taking the inventory there is found on hand a much 
larger fraction of the total annual product of one class than 
of another. Suppose that before taking the inventory two- 
thirds or 600,000 pounds of the large disks were sold at 3 cents 
per pound, the selling expense being 0.3 cents per pound, 
and one-third or 60,000 pounds of the small disks at 2.5 
cents per pound with a selling expense of 0.5 cents per pound, 
what is the profit on each size, and what is the inventory 
value of the remainder? 





Labok Disks 








Sold 600.000 lbs. @ (3-0.3)^ 
Cost @ 2.524^ 


$16,200 
15.143 


00 
33 


or ^2.191 
or 


$16,200 
13.146 


00 
00 


Profit 


t.056 


67 


3.054 


00 



Small Disks 



Sold 60.000 lbs. d (2.5 -0.5) t 
Cost d t.047^ 


1.200 
628 


00 
20 


or @ 2.711 

or Loss 
or 


1,200 
1.626 


00 
87 


Profit 

Sum of profits 


571 
1.628 


80 

47 


426 
2.626 


87 
13 



Putting the transactions in ledger form we have: 

Dr. Labob Disks Cr. 



900.000 @ 2.524 
Profit 


22.715 
1.056 


00 
67 


600,000 @2.7 
Bol. 300.000 2.524 

600.000 2.7 
Bal. 300.000 @2.!9I 


16.200 
7.571 


00 
67 


or 

900.000^2.191 

Profit 


23,771 

19.719 
3,054 


67 

00 
00 


23,771 

16.200 
6.573 


67 

00 
00 




22,773 


00 


22.773 


00 



Small Disks 



180.000 1.047 
Profit 


1.884 
571 


60 
80 


60.000 2 
Bal. 120.000 1.047 

60.000 2 
Bal. 120,000 2.711 
Loss 


1.200 
1.256 


00 
40 


or 

180.000 2.711 


2,456 
4.880 


40 
60 


2.456 

1.200 

3.253 

426 


40 

00 
13 
87 




4,880 


60 


4.880 


60 



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110 



BOOKKEEPING AND COST ACCOUNTING 



Suppose that all the disks are sold, leaving no inventory, 
then, for the two assumed values of scraps, we have: 



Profit on investment of capital: 



Scrap at O.d^ total 
Per lb. 

Scrap d 1.76^ total 
Per lb. 



Larob Disks 



Cost Profit 



22,715 
2.524^ 

19.719 
2.181 



1585 
0.176^ 

4581 
0.519 



Small Disks 



Cost 



1884.60 
1.047^ 

(880.60 
2.711 



Profit 



1715.40 
0.953^ 
Loss 

1280.60 
0.71 



All Disks 



Cost Profit 



24,599.60 
2.278 

24,599.60 
2.278 



3300.40 
0.356fi 

3300.40 
0.356 



If the scrap is charged at the market value, the apparent 
cost of the small disks is much too low, and the apparent 
profit much too great. 

If the scrap is charged at a price equivalent to that of new 
material, the cost of small disks is too great, leading to an 
exaggerated inventory value and to a large apparent loss 
when the disks are sold. Both methods of computing costs 
and corresponding inventory values and profits are wrong. 
Some compromise value of the scrap used for the small disks 
must be found. 

It will not be correct to lump the two sizes of disks together, 
using the average cost 2.278 cents per pound, thus eliminating 
the question of the value of the scrap, for that would make 
the small disks cost more than their selling price less selling 
expense. 

It would appear to be fair to fix the price of scrap to be 
credited to the large disks and charged to the small disks at 
such a figure as would split the difference between 0.8 and 
1.76 cents, making it 1.28 cents, thus allowing the large disks 
to gain 0.48 over the market value of the scrap and the small 
disks to gain an equal amount over what they would have to 
pay if they were made from new material at 2 cents per pound 
or from scrap at the equivalent value of 1.76 cents. Figur- 
ing in this way we obtain revised cost and profit estimates as 
follows: 



Large Disks: 

Material, 1.200.000 ^ if 
Less 300.000 ^ 1.28 



Labor 
Burden 



SeUinc i»rioe, net ^ 2. 7 
Profit, 0.349^ per lb. 

Small Disks: 

Material 3000.000 ® f .28^ 
Less 120.000 ^ 0.8 



Labor 
Burden 

180.000 d 1.911^ 
Selling price, net ^ 2^ 

Profit. 0.089^ per lb. 



24.000 
3.840 

20,160 
330 
669 

21,159 
24.300 

3.141 



3,840 
960 


2.880 
360 
200.60 


3.440.60 
3.600 



Capital in machinery 
Capital in stook 



$3141 -^ 6000-52. 35% 



Large Disks 
2000 
4000 



Small Disks 
500 




6000 500 

159.40+500-31.88% 



159.40 



This is probably a close enough approximation to true 
costs, considering that in actual business there would rarely, 
if ever, be such a balance between supply and demand for 
scrap that none of the large scrap would have to be sold at 
the market price for scrap used for remelting, or that there 
would be no need of purchasing new material for the small 
disks on account of the deficiency of scrap — also that so 
much of the burden charged is based not on actual expendi- 
tures but on estimates, which themselves are based on 
hypotheses or guesses. 

Moral: There is no such thing as " true cost " when the 
product is varied in kind and when one product gives by- 
products to be utilized in another product, but the account- 
ants and the management should make every effort to obtain 
as close an approximation to true costs as possible. 

Elbourne (Factory Administration and Accounts) says: 

''The art of costing is essentially one of close approximation.s 
rather than the collection of absolute facts. However precisely 
the net quantities of materials are obtained there will be a call 
for judgment in the prices to be charged in the costs. 

''Until men become absolutely automatic machines and the 
administration is perfected in the last degree there can be no 
guarantee of the absolute accuracy of the time charged to a given 
job. Those systems that provide for the time lost between jobs 
being charged up to a special account neglect the human nature of 
most foremen. 

"As to strict accuracy in the allocation of works expenses, this 
is obviously impossible, but it is in this field that so much return 
is yielded by a scientific investigation of the approximately true 
incidence of expense." 

The Cost of Silver (from an article by James H. Collins 
in the Saturday Evening Post, October 14, 1916). 

"Silver has been so thoroughly a by-product during the past 
generation that the West has almost forgotten how to figure costs 
upon it. 

"Some estimates of cost can be made from the reports of rep- 
resentative mining companies. The mountain at Bingham, Utah, 
worked by steam shovels, last y§ar yielded 150,000,000 pounds 
of copper, 370,000 ounces of silver and 35,000 ounces of gold. The 
cost of operating was $12,000,000 and the metals sold for $27,000,- 
000. This gave an all-round cost of leas than 50 per cent; 
and as the silver sold for 50 cents an ounce its cost might be set 
at about 23 cents. The Bunker Hill and Sullivan mine, in 
Idaho, yielded 75,000,000 pounds of lead and 1,300,000 ounces of 
silver. Operating costs were about $3,000,000 and the metab 
sold for about $4,000,000. With silver at 50 cents an ounce 
the cost was 37 cents." 

When silver is produced as a by-product of gold and 
copper or of lead, it is absurd to say that its cost is 23 
cents or 37 cents per ounce, or any other figure. A farmer 
might figiu^ the cost of raising sheep, but he could not 
figure separately the cost per pound of producing wool, 
hides and mutton. 



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PROBLEMS AND DIFFICULTIES. STANDARD COST 



111 



HOW TO REDUCE COSTS. STAin>Aia> COST 

The cost accountant may consider that his work is finished 
up to any given date when he is able to show figures for the 
co6t of each article in the warehouse, the cost of assembling 
it from the finished parts, the cost of each part, and the cost 
of each operation on each part, but when all of these figures 
are available the work of the cost analyzer (or of the Factory 
Cost Committee) has only just begun. His problem is to 
answer the questions. Why did this operation cost so much? 
What are the elements into which this operation may be 
divided? What is a reasonable standard time for each 
element? What must we do to bring down our actual 
operating times to or near the standard time? 

Assuming that the operation in question is one done on a 
machine tool, in order to reach minimum costs the following 
requirements must be met before the machinery operation is 
started. (C. U. Carpenter on "Profit-making Manage- 
ment.") 

1. There must be ample stock delivered to the workman before 
he stops work upon his preceding job. 

2. The stock must be so placed as to be most easily reached or 
handled by the workman. This presupposes a standard place 
for the stock. 

3. The clamping devices must be simple, effective and atandardy 
and must be supplied to the workman before he is ready to 
start. 

4. The tools must be standard in every respect, groimd to 
proper shapes and supplied to the workman before he is ready 
to start. 

5. The jigs, fixtures, punches, dies, gages, etc., must be so 
designed as to be handled easily, quickly and accurately, and 
must be at the workman's side before he is ready to begin work 
upon his new job. These tools and gages must be inspected for 
accuracy regularly so that the foreman and workmen may have 
full confidence in them. 

6. All stock coming into a department nvust he inspected before 
it is placed upon the department platform. 

To the above-named requirements several more may be 
added, which relate to the machine itself, such as: The 
machine must be of the kind and size best suited for the 
work; it must be rigidly supported, in good repair; properly 
belted and geared; lubricated with the^ right kind of oil; 
its working table at the proper height and its operating levers, 
handles or wheels so arranged as to involve the least possible 
fatigue to the workman; it should be in a sanitary location 
and well lighted. 

When all of these requirements are fulfilled, and not before, 
time studies should be made, by means of a stop watch or 
other timing device, such as Gilbreth's chronocyclegraph, of 
the following: 1, The time required to handle the part or 
parts; 2, The time required to " set up " the job; 3, The 
time required for the machinery operation; 4, The time 
required to remove the work. 

The next consideration in the matter of reduction of costs, 
and obtaining standard costs, is the selection of the kind of 
man beet suited for the work. It is evident that if the work 
is of a simply and repetitive character, such that an ordinarily 
intelligent and willing day-laborer can do it easily after a 
iew weeks' practice under instruction, it is not good economy 
to have it done by an all-round expert machinist, a 4-dollar-a- 



day man. A $2 man, encouraged by a bonus which will 
enable him to earn S3 a day without undue fatigue, when he 
becomes skillful, will do more work than the S4 man, whose 
rightful place is in the tool room or in charge of a machine 
operating on a variety of work requiring a wide range of 
knowledge and experience. 

Standard conditions, standard times and standard task 
and bonus rates having been thus determined by the cost 
analyzer or the cost committee for different operations, the 
figures are handed to the cost accountant, who now has a 
new and most important job, the preparation of Standard 
Prime Cost cards for different operations, and the charting 
of costs of operations on all the machines of the shop, so that 
a basis maybe had for the Predetermination of costs of 
future work. 

When job tickets and instruction cards are given out for 
new work, the standard times may be entered on them, and 
if in actual operation the standard times are not reached the 
foreman may be called on for an explanation and the proper 
remedy applied. 

Some of the things to be considered when costs appear to 
be too high are listed below: 

Idle time. 

Load factor of machines. 

Revision of burden charges. 

Can total burden be reduced? 

Is it properly apportioned to departments and machines? 

Cost of the cost accounting system. 

Re-design of patterns. 

Change in system of manufacture. 

Change in material. 

Standard Costs. Manufacturing plant has the capacity for a 
certain production, and incurs burden charges in maintaining^ 
that capacity. These charges must be distributed over the 
standard production. This means the determination of standard 
costs for burden, as well as for labor and material, and enables 
a standard of cost to be established for all products. If the cost 
accounting is to be of maximum value, much emphasis must be 
laid on the importance of knowing more than present cost alone. 
Costs should be established which represent siandards by which 
to gain a true conception of the value of results. — Chnton H. 
Scovell. 

Universal Cost Formula (Harrington Emerson). 

Material cost-(-Man cost+Machine cost=Value 

Q, T, and <, are the Quantity Factors 
P, PT, and R are the Quality Factors 
QP+TW+tR ^Yb\m^, 

Cost Formula separating Burden from Direct Costs: 

(1) QP+TW+tR+P+M+S+R=^Co8>i 

QP = Value of Direct Material, 
rpr« Value of Direct Labor, 
tR ==Cost of Machne Hour, 
P =Cost of Power, 
M =Cost of Maintenance, 
S =Cost of Supervision, 
R =Cost of Rent, 



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BOOKKEEPING AND COST ACCOUNTING 



(2) Q(P+Bp)+T(W+Bw)+t(R+Br)=Co8t. 

Q = Quantity of Direct Material. 

P = Price per unit of material. 

Bp = Burden on Price. 

T = Quantity of Direct man-hours. 

W = Hourly Wage. 

Bw = Burden on Hourly Wage. 

t s Quantity of direct machine-hours. 

R = Rate per machine-hours. . 

Br = Burden on rate. 

Causes of High Cost of Work in Govemment Arsenals 
(Extract from a statement by Col. C. B. Wheeler, Ordnance 
Dept., U. S. A., in the hearing before the House of Repre- 
sentatives Committee to investigate scientific management. 
Vol. 1, p. 110). 

After considerable thought on the subject I am led to believe 
that the present unsatisfactory condition as to relative cost of 
manufacture to which attention has been invited, results from a 
series of conditions most, if not all, of which are correctable by 
proper management and which, of course, can be materially 
assisted by hearty cooperation. 

The following appear to be the principal causes which increase 
cost of production, or have a tendency to, and to which especial 
attention must be constantly given to insiu^ results tending 
toward economy, viz. : 

1. Frequent changes in management. 

2. Absence of system and shop management. 

3. The number of working days each year allowed for holidays 
and vacations, amoimting each year at Watertown Arsenal to an 
expenditure of approximately $30,000. 

4. Lack of a proper stock of supplies. 

5. The conduct of all work on the day's pay system. 

6. The restrictions imposed by laws and regulations especially 
as to the procurement of material. 

7. Lack of coordination of the work being carried on in the 
different shops. 

8. Multitudinous duties of foremen. 

9. Lack of sufficient tools of proper power. 

10. Loss of time in looking for proper and necessary tools and 
fixtures. 

11. Loss of time due to employees waiting at grinders and at 
the tool room. 

12. Loss of time due to breakages or repairs of machines and 
belts. 

13. Loss of time waiting for the next job. 

14. Losses due to lack of proper instructions or to spoiled work. 

15. Lack of a proper tool-room equipment. 

16. Lack of proper transportation faciUties in the shops, such 
as cranes, hoists, and runways. 

17. Wastage and lack of economy in the operation of the power 
plant. 

18. Lack of proper attention to costs of detailed operations. 

19. Endeavor to make parts with poor facilities and at great 
expense which can be procured very much cheaper. 

20. Delays in getting material when needed, causing changes in 
plans. 

21. Additional cost of transportation service between shops 
under a system that permits a helper for each teamster. 

22. The large amount of metal that is frequently left on cast- 
ings and which has to be removed. 

23. The conunencement of work before a sufficient supply 
of material is on hand to finish the job. 

24. Failing to take full advantage of the machines or tools 
provided; and, finally, a lack of information as to the best 
practice. 

Perhaps the most important of all these items is lack of system 



and shop management, since once established many of the other 
items would naturally be drawn into line for elimination. A 
system that would most economically produce the results desired 
is under consideration and already some progress has been made 
toward its adoption. It is expected when in nmning order to 
reUeve the management, including the foremen, from numerous 
exhausting details, the time consumed on accoimt of them* bein'* 
more profitably employed in other directions. 

Concerning methods of distributing expense burden, CoL 
Wheeler said (page 791): 

Prior to 1906 shop expenses were imknown to the Ordnance 
Department, and all labor, no matter how promiscuous or diffi- 
cult of apportionment, was charged directly to order. This 
involved an immense amount of unprofitable clerical labor. 
The department was, however, so wedded to this old system of 
charging everything directly to orders, and was otherwise so 
conservative, that for a long period after Congress authorized 
the taking of a valuable share of productive labor costs to pay 
shop expenses, there was a feefing that the efficiency of an estab- 
lishment was measured by the smallness of the shop expense 
percentage, and great stress was laid upon the ratio of the non- 
productive to the productive labor at the various arsenals. 
This standard for the measurement of efficiency is entirely wrong. 
The only proper way o^ considering this matter is to determine 
whether or not the non-producer is profitable — that is to say, 
fully occupied in keeping the skilled producer at the kind of 
work for which he was employed and for which he is best fitted. 
A comparison of shop-expense percentages is generally mislead- 
ing and can not measiue efficiency of production. 

The method now in force is one which causes orders passing 
through the manufacturing departments to contribute more 
equitably their proper share to the shop expense fund by appor- 
tioning the shop expenses to them in accordance with the man- 
hour or machine-hour costs involved in their execution. The 
result of such apportionment is that the larger pieces requiring 
the larger and more expensive machines contribute more per 
hour to the shop expense fund than do the smaller pieces requir- 
ing smaller machines or perhaps only bench work. Any system 
of shop expense recruitment based upon a percentage of direct 
labor charges means that smaller work carries the larger. 

REDUCING THE COST OF THE COST ST$TEM 
The chief objection to all elaborate cost-finding systems is 
that they cost too much; that their operation involves the 
employment of a small army of clerks, and that the informa- 
tion obtained is not worth what it costs. A good cost system 
is a necessary element in scientific management, the aim of 
which is the elimination of useless work and of waste motions, 
and the consequent reduction of costs. The principles of 
scientific management should be applied to cost systems 
themselves as well as to manufacturing operations. 

In order to illustrate what may be done in the direction of 
reducing the cost of a cost system we may take an imaginary 
case of the costing of an order for 10,000 locks m a large hard- 
ware factory in which all the paraphernalia of a cost system 
based on the normal machine-hour rate have been installed. 
Every machine, work-bench or other center of production has 
its hourly burden rate fixed, all work is done and all stores are 
issued on written orders. Job tickets are used for each 
operation on each piece that enters into the finished product, 
and from the data obtained from these tickets is found the 
cost of each product delivered into the warehouse. 

The raw materials, which are in the store ready for the 
manufacturing operations, consist of iron and brass casting, 



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113 



steel drop forgings, sheet, band, wire, rivets and screws. 
The clerical work done in connection with the progress of the 
order through the shop involves the following: 

Permanent blue print or carbon: 1 stores issue for all the 
material; 1 schedule of parts; 1 route sheet; 1 set of instruc- 
tion cards. 

Produdtum order ^ reading as follows: 

Production Order No. 1117. Date 2/20/17. 

Make 10,000 locka, style X -45. 

The part and routing schedules show that there are 10 
parts to each lock (not counting duplicates of any part) 
and that there are on an average five operations on each part, 
besides the operations of inspection of parts, assembling, 
testing, japanning, final inspection and packing. 

The work is done by ten different men, using ten machines 
or work benches. 

The time of each man averages forty days of nine hours 
each, making a total of 3600 man-hours. 

All the work is on piece work or task and bonus, and the 
average earnings are thirty cents per hour. 

The total direct labor cost is $1080 or 10.8 cents per lock. 
The total material cost is 500 or 5.0 cents per lock. 

The total burden cost is 920 or 9.2 cents per lock. 

2500 25.0 cents 

In order to obtain the labor and burden costs we start 
with the time-keeping. Here we meet the first application 
of scientific management to the cost system, the finding out, 
by careful investigation and accurate recording, which is the 
best and at the same time the cheapest way of keeping time. 
There are many different ways, starting with the old-fashioned 
foreman's or time-keeper's time book. Those in conmion 
use may be compared as below: 

TiME-KEEPINO StSTEUB 



Daily Time Tickets 



10 men, 40 days, 400 
tickets. 

(1) As there are 60 jobs 
on each lock there 
may be two or three 
jobs entered on some 
of the daily tickets. 

(2) Or else a separate 
ticket may be issued 
when a man works on 
more than one job in 

a day, making say 600 

tickets. 



W^eekly Time Tickets 



The 40day8 mayindude 
6 whole weeks and 
parts of two others, 
making 8 weeks. 

(3) 10 men. 80 tickets, 
each ticket having a 
record on it of the dif- 
ferent jobs done by a 
man in each day. 

(4) or a new ticket may 
be issued when a man 
changes his job during 
the week. This may 
double the number of 
tickets, making 160 
tickets. 



Job Tickets 



As there are 60 opera- 
tions on each lock one 
ticket may be used for 
each, on which an 
entry is made of the 
man's No., Name, Ma- 
chine No., Production 
No., Job No., Part 
and operation symbol. 
Hours, Pieces made. 
Piece Rate, Bonus and 
Burden. All of these 
data are transcribed 
from the time tickets. 

(5) 60 tickets, 160 or 
800 entries, according 
to whether daily or 
weekly time tickets are 
used. 

(6) Combined Time and 
Job tickets. No. 4 
tickets may have en- 
tered on them all the 
data of the jobs, thus 
saving the transcrib- 
ing of 160 tickets. 



Production Order, 1,117 
Job No., 19,172 
Week ending 3/10/17 
Workman's No. 126 
Workman's name, J. Jones 
Machine No. L 13 
Piece symbol, AEF 
Operation symbol, Dg 
Hours, 54 
Pieces made, 1 520 
Piece rate, 0.9 13.68 

Bonus, 30% 4.10 

Wages 17.78 

Burden, 54 hr. X30 16.20 

Labor and Burden cost 33 . 98 
Mateiial (on store card) 
Defective pieces, 12 

The back of this card has the "in" and "out" times 
stamped on it by the clock, from which the hours for the 
week are figured. The burden rate is taken from a table 
of the normal rates of the several machines. The card may 
also have a memorandum of the number of spoiled or defec- 
tive pieces, stating whether they were due to flaws in the 
material or to bad workmanship. 

The cards are sorted by workmen's numbers and posted on 
the pay roll. They are then sorted by machine numbers, 
and the total hours for each machine for the week entered 
on the machine-hour record sheet. They are finally sorted 
by piece symbols, and the figures are entered on the piece 
cost cards. They are then filed in envelopes or folders bear- 
ing the piece S3rmbols for future reference. 

The Piece Cost Cards may contain the following informa- 
tion: 

Piece Symbol A£F 
Prod, order 1,117, 
No. of pieces Finished 

Material lbs. @ 

Total direct labor Total cost 

Total burden Cost per 100 pes. 



Job No. 


Operation 


Pieces 


Labor 


Burden 


Total 


I9I7I 


Fg. 


2000 


4.00 


3.00 


7.00 


2 


dg. 


1520 


17.78 


16.20 


33.98 


3 


mg. 


1400 


9.30 


10.00 


19.30 


1 


fg. 


2200 


4.40 


3.30 


7.70 


2 


dg. 


And so on 


until aU the 


operations 


on AEF for 


3 


mg. 


10.000 lo 


cks are finis 


hed: 





Laboi and Burden on 42 pes. spoiled 
Cr. for value of scrap 

The totals on the Piece Cost Cards are transferred to a 
Finished Product Cost Sunmiary. 

Fimshed product X— 45 

Prod, order 1 1 17 Finished 4/21/17 

No. made 10.000 Cost each 10.25 



The combined time and job ticket No. 6 has the follow- 
ing information: 



Piece 


Material 


Labor 


Burden 


Total 


Cost per 
100 


AEF 

G 

H (etc.) 

Inspection 

Assembling 

Japanning 

Testing 

Packing 












Total 


500 


1080 


920 


2500 


$25.00 



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114 



BOOKKEEPING AND COST ACCOUNTING 



The final result, $25 per 100, is entered on the Stores Inven- 
tory Card for X-45 and is used as a basis for the annual 
inventory value, for fixing selling prices, and for various 
statistical purposes. 

Let us suppose that the cost system above described has 
been installed by a " systematizer," and is in operation in one 
department only of the hardware factory, the lock depart- 
ment, and that the first production order has been completed 
under it, the daily time ticket. No. 2, having been used. The 
manager investigates the results, and he is satisfied that the 
reported cost, 25 cents per lock, is as near to the true cost as 
can be ascertained by any system. It is accurate as far as 
the cost of material and direct labor is concerned, but the 
burden is based on two assumptions which may be far from 
accurate; one is the estimated life of the machinery, from 
which the charge for depreciation reserve is based, and the 
other is the estimated number of hours that the machines 
will run during a normal year, from which the normal hourly 
burden of the several machines is calculated. The calculated 
total burden in the cost of the 10,000 locks, $920, may be 
as much as 25 per cent, or $230, too high or too low, and the 
true cost of the locks instead of being 25 cents may be any- 
where between 22.7 cents and 27.3 cents, a difference of 9 
per cent in either direction. In fixing the minimum whole- 
sale selling price the manager will add the 9 per cent to the 
recorded factory cost, in order to be on the safe side, besides 
making a liberal estimate for selling and administrative 
costs. 

He now begins to figure the cost of the cost system. For a 
production order involving the work of ten men for forty days, 
it has involved the writing of 800 time tickets, 60 job tickets 
with 800 entries on them transcribed from the time tickets, 
10 piece cards with about 20 entries on each, and one cost 
summary card, with about 10 entries. If the whole factory- 
has 1000 men, working 300 days in the year, on light hard- 
ware involving a multiplicity of operations and the same 
clerical work in proportion, the 861 cards will be multiplied 
by 7500, making nearly six and a half millions of cards per 
year and about as many transcriptions from one card to 
another. 

No time study or motion study of clerical work has been 
made and the cost of cost-keeping has not been segregated 
from the cost of making up the pay roll, doing the ordinary 
bookkeeping, and making statistical records, but the man- 
ager makes a rough guess that there will be 6,000,000 cards 
handled in a year, that one minute's time on the average will 
be spent on each, making 100,000 hours of clerical labor, at 
20 cents per hour =$20,000 cost of the cost system per 
year. 

The manager, while startled at the figure, has more impor- 
tant matters in hand than studying the merits of cost S3rstems, 
so he turns the job over to a scientific management expert, 
for study and report on the questions whether this cost system 
is suitable for the requirements of the business, and whether 
or not its cost can be reduced. 

The expert is not a cost accountant, which is probably to 
his advantage, for he has nothing to unlearn. 

He starts his investigation by getting acquainted with all 



the facts that are available in connection with the cost system 
as applied to these 10,000 locks. He finds the time tickets, 
pay rolls, job tickets, stores, issue cards, piece cost cards, and 
cost summary, all leading up to the final conclusion, that the 
cost of these locks, packed and delivered to the warehouse is 
25 cents each. He finds the theory or theories on which the 
cost system is based, viz., that the cost of a lock is the simi 
total of the cost of every machine or manual operation on 
every piece, and the cost of every piece of raw material 
that enters into the lock, and that each piece and each 
operation or job is saddled- with what is supposed to 
be its proper share of the " burden " or general expenses 
of running the factory, including administration and 
supervision, planning, clerical' work, power, heat, light, 
lubrication, internal transportation, services of watch- 
men and cleaners, storekeepers, messengers, stationer}", 
and other supplies for the factory or office, besides a charge 
for depreciation due to wear and tear, obsolescence and inad- 
equacy and a charge for interest on the investment in the 
factory and its operations. He examines the theory and 
method of allotment of the burden, and finds that the old- 
fashioned and grossly inaccurate methods ''percentage on 
direct labor " and " man-hour," have been rejected and the 
more modem and more accurate normal machine-hour rate 
method adopted. The method of fixing the rates for the 
several machines and production centers is investigated 
and approved. 

The first criticism he makes is that the estimated normal 
number of hours of operation of the various machines in a 
year is only a guess, and that there are no available statistics 
by which the estimate might be checked. This defect, how- 
ever, will be corrected in time. The probable error of the 
estimate is not serious and is on the right side,, that is it tends 
to make the recorded cost greater than the true or approx- 
imately true cost. 

The next minor criticism is that the whole burden is dis- 
tributed on the machine-hour rates, whereas a more strictly 
accurate accounting would distribute on this basis only that 
portion of the burden that had a relation to the machine 
hours, distributing the rest of it partly on material and partly 
as a job charge for clerical and supervisory service, inde- 
pendent of the time the job lasted. This refinement, however, 
in a general hardware manufacturing business, where nearly 
all the work is done in large lots and each job usually lasts 
several days or weeks, is probably not necessary. The 
material burden may be included in the prices charged by the 
stores to the factory, and this avoids the trouble of entering 
it on the job ticket. 

So far as the theory and accuracy of the cost system is 
concerned with the exception of the two minor objections 
stated above, the expert finds no fault with it, but in regard to 
the mechanism for carrying out the S3r8tem he finds it unnec- 
essarily complex and troublesome. The first important objec- 
tion is that the use of the daily time ticket No. 2 and the 
transcribing of the figures on it to 60 job tickets involves a 
needless waste of labor. He recommends for it the substi- 
tution of the combined job and weekly time ticket No. 6. 

Continuing the investigation he has all the records tran- 



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PROBLEMS AND DIFFICULTIES. STANDARD COST 



115 



scribed onto 160 job tickets in order that they may be analyzed 
and conclusions drawn from them. He subdivides the pro- 
duction order for 10,000 locks into ten orders for 1000 each, 
and makes a tabulation of the material, labor and burden 
cost of each of the ten lots. Since each lock requires exactly 
the same amount of material, the cost of material for each of 
the ten lots is the same, and since the work is done and paid 
for on the task and bonus system, after numerous time studies 
have been made to determine the proper task and the men 
have become so skilled that they always earn their bonus, the 
daily variation in the men's wages is slight, while there is 
almost no variation in the total labor cost from week to week 
or from one lot of 1000 to another. The machine hours also 
are practically uniform with each lot, and, therefore, the 
burden chai^ has the same uniformity. If the total burden 
charge for the 10,000 locks is S920, and the burden computed 
for each lot of 1000 locks ranges only from $90 to $94, what 
is the use, he says, of computing the individual burdens on 
each one of the 60 operations? If we obtain the labor and 
burden costs of each operation on the first 1000 locks on the 
combined job and weekly time-card system, what is the use 
of continuing this elaborate and costly system for the other 
9000, provided no change in the machine methods or labor 
conditions have taken place? 

It is desirable to know, for statistical purposes, and to 
study the comparative results at different times and with 
different machine methods, the cost of each piece and of each 
operation on each piece of lock X-45, but this can be deter- 
mined with all the needed accuracy just as well on 1000 locks 
as on 10,000. 

The expert then recommends the following modifications 
of the cost system. Have the Production Order read as 
follows: 



Production Order No, 1 1 1 7 
Make 10.000 locks, style X -45 



Date 2/20/17 



Obtain detailed costs, including burden, of each operation 
on the first 1000 or 1500 locks by the combined job and 
weekly time-card system (No. 6). For the remainder use 
weekly time tickets only (No. 3), without job tickets, obtain- 
ing labor cost only, to be charged to the production order 
No. 1117. The weekly time tickets will have the following 
information: 



Production Order 1, 


117. 


(continuation) 




week ending 3/17/17 


Workman's No. 156 






Workman's name J. 


Jones . 


Machine No. 13 






Hours 54 






Pieces made 1500 






Piece rate cents .09 




13.50 


Bonus 30% 




4.05 


Wages 




17.55 


Defective pieces 






Symbol AEF-Dg 







If the man works on more than one machine or on more 
than one operation during the week the entries on the card 
may appear thus: 



Machine No. 


B 


L 13 


L 13 


Total 


Symbol 


AEF. Fg. 


AEF, Dg. 


AEH. Dg. 




Hours 


24 


20 


10 


54 


Pieces 


1200 


560 


300 




Piece rate 




0.9 


0.8 




Hourly rate, cents 


30 








Wages 


$7.20 


$5.04 


$2.40 




Bonus 




1.51 


.72 






$7.20 


$6.55 


$3.12 


$16.87 



Piece Cost Cards and Cost Summary Cards will be made up 
from the job tickets of the first lot only, and from these the 
burden per 100 or per 1000 locks will be calculated, and this 
burden will be considered the standard burden charge on 
these locks as long as the piece rates of the various operations 
remain unchanged and the weekly earnings of the men when 
working full time remain fairly constant. The final cost of 
the 10,000 locks, at which they are to be charged to the ware- 
house, is then made up as follows: 



Mateiial: 

As per stores issue cards 
Labor: 

Total of all the time tickets (by adding machine) 
Burden: 

10,000 locks (Standard burden 9.20 per 100) 



Per 1 00 Locks. 



$5.00 
10.80 
9.20 



25.00 



The machine numbers and machine hours are entered on 
the weekly time tickets so that they may be entered in the 
machine time record, which is kept for the purpose of com- 
puting the loss due to idle time of machinery, and the number 
of hours the machines will probably run in a normal year, 
which is used in establishing the normal machine-hour rate. 

The next time a production order for the same style of locks 
is run through the factory it will not be necessary to make job 
tickets for a portion of the order unless there has been a 
change in the manufacturing method, in the piece rates or 
in the speed of the machines. The weekly time ticket gives 
all the information required for pay roll, statistical and ac- 
counting purposes, and the burden is added only when the 
order is finished, at the standard rate determined when the 
previous order was going through the factory. By these 
modifications of the cost system the cost of operating it will 
be greatly lessened. 

PROBLEM. THE FACTORY COST OF STEAM ENGINES 
AND OF STEAM TX7RBINES 

Suppose that a factory is equipped for the manufacture of 
Corliss engines, with a*' total investment amounting to 
$200,000, subdivided as follows: 

Machinery and other equipment, including power 

pUnt $100,000 

Land, $10,000; Building, $20,000; all other aasets 

leas liabiUtieB, $70,000 100.000 



$200,000 



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116 



BOOKKEEPING AND COST ACCOUNTING 



Case A. Suppose that in a fairly good year the total 
product of the factory was sold for $200,000, made up of 
factory cost, $170,000; selling expense, $10,000; profit, 
$20,000, and that the factory cost was shown by the books 
to consist of the following items: 



Interest on investment at 5% 


$10,000 




Taxes and Insurance, 2H% on 120,000 


3.000 




Depreciation of Building 5% 


1.000 




Reserve for Depreciation of Equipment, 6% 


6,000 


$20,000 






Power Plant Expense: 






Labor 


2,000 




Fuel and Supplies 


2.000 




Current Repairs 


1.000 


5,000 






Machinery, current repairs 


3.000 




Tool room expenses 


4,000 




Drawings and Patterna 


3.000 


10.000 






Superintendence 


5,000 




Planning Room 


5.000 




Office Expense 


5.000 


15,000 


Other In(lii«et r^hor 




15,000 
5.000 


Miscellaneous SuppliM 


. 


Total Indirect Expense 


70.000 


Direct Labor 




70.000 


Direct Material 




30.000 


TntAl Factory Cost 


$170,000 



Suppose that in this year the factory machinery is on the 
average 30 per cent idle, on account of the impossibility of 
an engine works having the production of the several machines 
so perfectly balanced that every machine will be employed 
continuously the whole time. 

Case B. Suppose that in another year of exceptionally 
brisk business it is possible to reduce the idle machine time 
to such an amount that the factory handles 20 per cent more 
material, and uses 20 per cent more direct labor, without 
any increase of the indirect expense. The factory cost then 
will be 



Indirect Expense 
Direct Labor 
Direct Material 



$70,000 
84.000 
36.000 

$190,000 



and the total sales will also be increased 20 per cent, or to 
$240,000 without any increase of the selling expense, the 
profit and loss account showing: 



Gross Sales 
Selling Expense 

Factory Cost 
Profit 



$240,000 
10.000 

$230,000 
190.000 

$40,000 



Case C. Suppose that a few years later the advent of the 
steam turbine has reduced the demand for Corliss engines 
to such an extent that it is no longer possible to sell the larger 
sizes of them in competition with larger factories which are 
able to build them cheaper, and, in consequence, the larger 
planing and boring machines remain idle a whole year; the 
smaller sized engines for which there is still some demand 



continuing to be built, but in smaller numbers, so that the 
total direct labor is cut down to $35,000, and the direct mate- 
rial to $15,000, and the sales to $100,000, while the indirect 
expenses, which have been pared down as much as possible, 
appear as follows: 



Interest, Taxes and Depreciation as befote 

Power Plant Expense 

Machinery, current repairs 

Tool Room Expenses 

Drawings and Patterns 

Superintendence, Planning Room, Office Expenses 

Other Indirect Labor 

Miscellaneous Supplies 

Total Indirect Expense 
Adding direct labor, $35,000, and direct material, 
$15,000 



Total Factory Cost 
Selling Expense 



Selling Price 



Loss 



$20.UUU 
4.000 
2.000 
2.000 
1.000 
12.000 
10.000 
3.000 

$54,000 

50.000 

$104,000 
10.000 

$114,000 
100.000 

$14,000 



SmilABT 





Case A 


CaseB 


CaseC 


Material 
Direct Labor 
Indirect Exi>ense 


$30,000 
70.000 
70.000 


$36,000 
84.000 
70,000 


$15,000 
35.000 
54.000 


Factory Cost 
Selling Expense 
Profit 


$170,000 
10.000 
20.000 


$190,000 
10.000 
40.000 


$104,000 

10.000 

Loss 14.000 


Factory Cost 

Per cent of Selling Price 


$200,000 
85 


$240,000 
79.2 


$100,000 
104 



Indirect Expenses expressed in 


percentages 






Case A 


CaseB 


CftiseC 


Of Material 

Of Labor 

Of Material and Labor 


233.3 

100. 

70.0 


194.4 
83.3 
58.3 


360.0 
154.3 
108 



Several problems arise in connection with the figures of 
cost shown by the book entries of these three cases A, B, C. 

1. Can the recorded factory costs be used as a basis for 
fixing selling prices? Answer: No, the selling prices are fixed 
by market conditions and not by the apparent factory costs. 

2. Can these costs be used to determine the inventory value 
of the engines remaining unsold at the end of either of the 
three years? Ansicer: They can in Case A, for in that year 
factory conditions were normal, and the book cost of the 
engines is probably as near an approximation to their value 
as merchandise in the warehouse, ready for sale, as can be 
obtained by any fair method of appraisal, but in case B 
the engines are worth more than their app>arent cost, and 
they should be valued on the basis of the factory conditions 
of Case A, that is on the basis of normal cost. In case C 
the engines are worth less than their apparent book cost, 
because that is higher than the selling price, even if the cost 



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PROBLEMS AND DIFFICULTIES. STANDARD COST 



117 



of selJing them was reduced to nothing. The engines remain- 
ing unsold are worth no more than they would be if they had 
been made under the conditions of Case A. 

3. What should be the recorded costs of the engines in cases 
B and C to be used in charging them to the selling department 
at factory cost, or in valuing them for the inventory? Answer: 
Assuming that the direct labor and material cost the same per 
engine in all three cases, then the engines should be charged 
or valued at the sum of the direct labor and material plus 
the normal burden or indirect expense per engines found in 
Case A. This would make the total cost to be charged 
against the engines as follows for the three years: 





Case A 


Case D 


CaseC 


Material 
Labor 
Burden, 100% 


$30,000 
70,000 
70.000 


$36,000 
84.000 
84.000 


$15,000 
33.000 
35,000 


Factory Cost 
Selling Ezpenae 


170,000 
10.000 


204,000 
10.000 


85.000 
10.000 


Total Cost 
Selling Price • 


180,000 
200,000 


214.000 
240.000 


95.000 
100.000 


Profit 


20,000 


26,000 


5.000 



4. How do you explain the profit of $26,000 instead of 
$40,000 in Case B and the profit of S5000 instead of a loss 
of $14,000, as shown in the former estimate? Answer: 
The profits of $26,000 and $5000 are merchandise profits of 
the selling department, which in Case B bought the engines 
from the factory for $204,000, spent $10,000 in selling ex- 
penses, sold them for $240,000 and made $26,000 profit; and 
in Case C, bought for $85,000, selling expense, $10,000, sold 
for $100,000, making $5000 profit. The difference between 
$26,000 and $40,000 is gain in the factory due to running 
overtime or with a larger labor force, caused either by greater 
activity of the selling force, the increased reputation of the 
engines, or general improvement in the demand for engines. 
This difference of $14,000 may appear in the factory books as a 
credit balance of Burden account, as overeamed burden, and 
in the general books as a credit to Profit and Loss Account. 
The factory books would show the following: 



Dr. 



Burden 



Cr. 



To various ezpenae accts. 
To company, to transfer 

balance, overeamed 

burden 



$70,000 



14,000 



By charges to Engine Costs 



$84,000 



The company's general books would show: 

Dr. Profit and Loss 


Cr. 






By factorj', overeamed 
burden 
Sales, profits on sales 


$14,000 
26.000 


Dr. Factory 


Cr. 


To Profit and Loos, transfer 
overeamed burden to 
Company 


14,000 







In Case C, the difference between $5000 profit and $14,000 
loss, or $19,000, is the loss due to idleness of men and machines 
in the factory caused by the decreased demand for steam 
engines, consequent upon the increased use of steam turbines. 
It would appear in the factory books as below: 



Dr. 



Burden 



Cr. 



To various expense accts. 



$34,000 



By charges to Engine costs 
By Company, to transfer 

balance, unearned bur> 

den 



$35,000 



19.000 



and in the Company books: 

Dr. Profit and Loss 



Cr. 



To Factory, loss due to un- 
earned burden 




.000 



Dr. 



Factory 



Cr. 



By Profit and Loss, unearned 
burden 



19,000 



5. Do the figures for overeamed or unearned burden con- 
stitute an index of the efficiency of the factory or of its man- 
agement? Anstoer: Not at all. The efficiency is practically 
the same in each case as far as the figures show, since the 
direct labor and material costs bear the same proportion to 
the selling price of the engines in all three cases. 

6. What do figures of overeamed or unearned burden indi- 
cate? Answer: They may, and generally do, indicate less or 
greater idleness of the machinery due to business conditions 
or to greater or less activity of the sales department, or to 
underestimates or overestimates of what is the normal bur- 
den of the several machines. Only a detailed investigation 
of all the facts can determine which. 

7. It appears that the Company's total profits on manu- 
facture and sales of engines were $40,000 in Case B, and the 
loss $14,000 in Case C, whether they are figured by the first 
method or by the second, in which the $40,000 in Case B 
is made up of $26,000-|- $14,000, and the $14,000 in Case C Is 
made up of $19,000 -$5000. What then is the use of com- 
plicating the bookkeeping by dividing the profits. or losses 
into two parts and of computing overeamed or uneamed 
burden? Answer: The advantage is in giving the owners a 
greater amount of desirable information as to whether the 
profits and losses are due to the factory, to the selluig depart- 
ment, or to general business conditions, and as to the cost of 
idleness in the factory. The subdivision is of especial advan- 
tage in giving more accurate inventory values of the product 
remaining unsold at the end of the year and of the work in 
process, on which inventories the profit and loss estimates 
depend. 

8. Is the $14,000 loss in Case C the actual loss in the engine 
business during the year. Answer: By no means; this 
apparent loss, as shown by the books, includes as one of the 
elements a charge for reserve for depreciation of 6 per cent 
on $100,000 =$6000, but as some of the heavier and more 



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118 



BOOKKEEPING AND COST ACCOUNTING 



costly machinery has been thrown entirely out of service, 
probably permanently, by the cessation of demand for large 
engines, these machines, costing, say, $20,000, have suddenly 
depreciated perhaps $10,000 more than the amount that has 
accrued to their credit in the reserve account. There has 
also been a large depreciation in the value of the drawings, 
patterns, jigs and special tools used in manufacture of the 
large engines, their value now being practically nothing. 
The total loss, therefore, instead of being $14,000 is more 
likely to be double that figure. 

Continuing the record of these supposition cases, we may 
next suppose that at the end of the year of Case C the account- 
ant presents to the directors of the company the tabulated 
statement above given showing a loss of $14,000 on the year's 
business, and also statements of the assets and liabilities of 
the concern at the beginning and end of the year, which may 
be condensed as follows: 

Statbmbnt Jan. I 
Net Resources 



Real Estate and Equipment 
Less Depreciation Reserve 


$130,000 
30.000 


100,000 
80,000 


Other assets less Uabilities 






$180,000 



Capital Stock and Surplus 



Capital stock 
Surplus 



$150,000 
30.000 



$180,000 



Statement Dec. 31 
Net Resources 






Real Estate and Equipment 
Less depreciation reserve 


$130,000 
37,000 


93,000 
73,000 


Other assets, less liabilities 






166.000 



Capital Stock and Surplus 



Capital Stock ' 
Surplus 



$150,000 
16.000 

$166,000 



The president says: Notwithstanding the loss of $14,000 
and the consequent reduction of our surplus from $30,000 
to $16,000, as shown in the books, our financial position is 
good. We have no notes payable outstanding, $10,000 cash 
in the bank, and $10,000 invested in bonds that are good 
collateral to borrow on. The question is shall we declare 
our usual 6 per cent dividend, which will take $9000 and 
reduce the surplus on the books to $7000? 

The general manager replies: " The books do not tell the 
whole story. The accountant has charged only $7000 to 



depreciation reserve during the year, taking no account of 
the fact that $20,000 worth of our best machinery is now per- 
manently idle, and ought to be sold at a quarter of its cost, 
in order to save insurance and taxes, and to make room for 
other machinery, if we can find some other product to make. 
Unless our sales department can get more business for the 
factory we had better be preparing for going into liquidation, 
rather than be declaring a dividend." 

The accountant was requested to answer the general man- 
ager, and he said: " The books never do tell the whole story. 
It is impossible that they can. They record the facts of 
actual transactions, such as the receipts and payments of 
cash, and the purchase and sale of goods; they record our 
guesses as to depreciation and depreciation reserve; but 
they do not record other things, such as appreciation of real 
estate and changes in market value of materials in store. 
Our apparent surplus of $16,000 is based on the theory that 
the net value of real estate and equipment is $93,000, its 
actual depreciation below its origmal cost being the $37,000 
accumulation in the reserve for depreciation account. This 
reserve account is based on a pure hypothesis, that 6 per cent 
per annum on original cost will cover the average deprecia- 
tion on all the machinery, during the whole of its life, includ- 
ing the depreciation due to obsolescence and inadequacy. 
It probably was fixed at this figure without any thought that 
the whole business of manufacturing engines was apt to 
become obsolescent, and that the heavier machines^ which 
might reasonably have been expected to have a life of 30 or 
40 years would become out of date in less than 10 years. 
Whether or not the $37,000 in the reserve account covers 
the total depreciation at the present time cannot be told by 
any sjrstem of accounting. The only way to determine it is 
to have an appraisal made, and even an appraisal at the 
present time will only be an approximation to the true value 
of the heavy machines. They are an expense and not an 
asset if they are kept standing idle; they are worth their 
secondhand or scrap value if they are going to be sold, and 
they may be worth all that they cost if they are going to be 
used in making other products. There is no use in changing 
their value on the books until we know what is going to be 
done with them." 

The president then said: " The accountant is right. The 
apparent surplus of $16,000 is only a book figure. It will be 
reduced to nothing at the end of next year if we sell the large 
idle machines at their present market value and continue the 
engine business at its present rate of sales $100,000 a year; 
it will be turned into a deficit of perhaps $40,000 or $50,000 if 
we liquidate the concern, either selling the business as a 
whole or selling the assets in parcels; it may be doubled if we 
continue in business, making other things which will keep our 
machinery running. The immediate question before us Ls 
that of declaring a dividend. The surplus, whatever it may 
be, has been accumulated by keeping the dividends low, 
returning to the stockholders only a portion of the net earn- 
ings in order not to have to stop dividends during a year or 
two of poor business. It would disappoint and embarrass 
the widows and orphans among our stockholders if we sus- 
pended dividends. If we decide to liquidate we may as well 



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PROBLEMS AND DIFFICULTIES IN COST ACCOUNTING 



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pay the $9000 dividend now. We have the cash to pay it 
with, and it will only be an installment of the larger dividend 
that will be paid when the concern Ls wound up. 

" I have had an appraisal made, and find the depreciation 
reserve on the books is S20,000 larger than the actual depre- 
ciation of our assets, basing the appraisal on the present value 
of the plant to a going concern, its cost of reproduction less a 
reasonable reduction for wear and tear; but it is S30,000 less 
than the probable depreciation if we intend to retire from 
business and sell the assets for what they will bring. 

" I now have a proposition to make for continuing the busi- 
ness and enlarging it. The A. B. Steam Turbine Co. has 
been building turbines for three years, and after overcoming 
many difficulties has now established an excellent reputation 
for its machines, but it has used up all its available cash and 
credit resources and is deeply in debt. I have made an 
arrangement with the company and its creditors, subject 
to your approval, to take over all its business. It will 
transfer to us its drawings, patterns, machinery, including 
some costly special machinery, and its stock of materials, 
supplies and finished parts, for S50,000 payable in stock of 
our company at par, and will give to us an exclusive license 
under its patents, for an annual license or royalty fee of 
810,000 payable cash in advance each year, with the pro- 
vision that when our sales of turbines amount to over 
$200,000 a year, there shall be an additional payment of 5 
per cent on the excess. We can also secure the services of 
the chief engineer and the chief salesman of the company at 
reasonable salaries. I haTe had reports on the turbine and 
on the machinery by two turbine experts, and they assure 
me that the proposition is a bargain. I propose that we 
have a committee of three, two of our directors and our fac- 
tory superintendent, to examine into the matter and report 
at a special meeting to be called by them next week. 

" I may say further that if we go into this business it will be 
advisable to manufacture turbines in advance of orders, so 
that we may have a few of each size, either completed, or 
nearly completed, on hand for prompt delivery. We should 
also carry quite a large stock of castings and other material 
and should invest some money in advertising and in sales- 
men's expenses. This will call for an additional issue of 
stock and I am ready to subscribe for $20,000 of it, payable 
in installments as it may be needed." 

The dividend was declared, the committee appointed and 
the next week the proposition was accepted and the new 
business was taken over. The accountant was instructed 
to make a new statement of assets and liabilities and to bring 
in a scheme for a system of accounting which would show 
separately the factory costs of engines and turbines of the 
several sizes. 



SCIENTIFIC MANAGEMENT 

That form of management that conducts a business or 
affairs by standards obtained through systematic research, 
experiment or reasoning.— Geo. D. Babcock, 1915. 

The laws of management worked out by Taylor and his dis- 
ciples are as fundamental as those of falling bodies. No manager 
or management can avoid making use of them in some form or 
other if they are honestly out for the combination " high wages 
and low labor costs." — H. F. L. Orcutt, Engineering (London), 
Sept. 7, 1917. 

Costing and Scientific Management. Scientific management is 
a 83r8tem based on the conception that the whole routine of the 
works, down to the last detaU of every operation, is organized 
by the management, so that confusion, over-lapping, delay and 
waste (both human and material) are avoided, and the course of 
the work is planned to run as smoothly, rapidly and efiiciently 
as possible. This system applies not only to works manage- 
ment, but also to costing and all the other accessories. There is 
yet httle recognition in this country [Great Britain] of the 




The Pyramid op Scientific Management 

necessity that costing should be tmdertaken by those who have a 
real knowledge of the work in question. Generally there is moie 
improvement possible in the arranging for costing than in any 
other department of works. Costing can and should be the 
greatest asset to the management; it should be the pulse of the 
whole organization, instead of being merely an approximately 
accurate record of performance in the past---sometimes m the 
distant past. — ^From a paper on "The Question of Scientific 
Management," by James Richardson, Engineering^ Dec. 21, 1917. 
Scientific management is really intensive thinking. It means 
that every problem shall be solved intellectually and not by 

means of trial and error and we may add to this that a 

large percentage of mankind not only hates such a practice, but 
is quite incapable of carrying it on. — ^From an editorial in the 
same issue of Engineering. 



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CHAPTER XIII 
USES OF COSTS. VARIOUS OPINIONS ABOUT COSTS 



CONCLUSIONS TO BE DRAWN FROM COST STATISTICS 

When the directors of a company have a sheet of cost 
statistics of the business laid before them what chief facts 
fihould be studied and what conclusions may be drawn? 

The cost statistics should show the factory costs of labor, 
material and burden for each of the several classes of product; 
they should also show the quantity of product of each class. 

The general books, or the books of the sales department 
should show the amount of sales, the cost of selling and the 
profits realized on each class of product. The factory costs, 
quantity of product, selling cost and profit (or loss) on each 
class of product should all be considered together, and the 
relation of profits to costs and to quantity should be studied. 

The principal object of the study is to determine what 
course of action will lead to the greatest profits in the future, 
both the immediate future and the distant future. 

The objects of a business are: 1, to make profits that may 
be used to pay dividends; 2, to organize and operate the 
business so that it may have a long life, even when subject 
to strong competition. The condition of long life is growth. 
When growth ceases and stagnation ensues decay comes 
sooner or later. 

Cost Keeping should be not merely the keeping of records 
of what goods have cost, but also of what they should cost 
under standard conditions, from which may be predicted the 
probable costs in future. 

When actual costs are notably higher than standard costs 
the reason why they are higher should be promptly ascer- 
tained and recorded. 

Uses of a Cost System. 1. To find the factory cost of articles 
delivered to the warehouse. 

(a) As a basis for fixing the price at which they shall be charged 
to the sales department. 

(6) As a basis for fixing their inventory value. 

2. To find the cost of the several elements that ent«r into the 
total cost (viz., material, labor and burden) of a finished article, 
of each part, and of each operation on each part. 

3. To furnish comparative records of costs of articles made at 
different times, or by different methods of manufacture, or under 
different conditions. 

4. To discover which part of the products of a concern are 
unprofitable; in order to form a judgment as whether to push the 
manufacture of an article or to abandon it. 

5. To inform competing manufacturers what our costs are, in 
order to induce them to keep a cost system and thereby to dis- 
cover that they are selling goods Ijelow cost. 

It is no satisfaction to a producer to know that the ignorance of 
his competitor will destroy that competitor, if another equally 
ignorant and dangerous follow him. The only hope lies in a 
complete education of all who enter a given competitive field, 



else that field is hazardous. — J. Newton Gunn, in " Business 
Engineering," by Alex. C. Humphreys, page 479. 

The competitor most to be feared, while he lasts, is one who 
does not know his costs, nor imderstand how to obtain them. — 
Henry R. Towne. 

Many concerns charge a certain percentage for overhead 
irrespective of what the expense really amounts to, and when they 
take an annual inventory, are surprised to find that their cor- 
rected earnings are very much less than they estimated. This 
ignorance or carelessness in the matter of the correct overhead is, 
I think, responsible for a great deal of ruinous competition, and 
although in many cases the low bidders fail after doing business 
for a longer or shorter period according to their resources, there 
always seem to be some new ones coming along so as to prevent 
the manufacturers whose costs contain aU the cost getting the 
proportion of business to which they are entitled. — Gershom 
Smith, Engineering Magazine , June, 1909. 

Uses of Cost. An accurate and reliable knowledge of costs is 
indispensable to success in closely competitive manufacturing 
and merchandising business. — S. S. Wheeler, Trans. Efficiency 
Society, Vol. 1 (1912;, p. 175. 

The function of the cost department is to gather information 
from which the management can outline its policies. — Clinton H. 
Scovell. 

The main value of the knowledge of unit costs is not to fix the 
selling price, but to lead to methods of cost reduction and con- 
trol.— B. A. Franklin, Eng. Mag., Vol. 43, p. 421. 

A cost system should primarily be so devised as to give the 
manufacturer an accurate knowledge of his most costly and exjien- 
sive operations, so that he may know unerringly these " high 
spots " and attack them vigorously. The cost system should 
provide a club with which to beat down costs. — C. U. Carpenter. 

Indirect costs may amount in some instances to as much as 
two or three hundred per cent of direct costs. Failure to take 
them into consideration may lead speedily into bankruptcy 
— C. B. Thompson. 

What do I want to know? How can the facts best be obtained, 
siunmarized and averaged so as to get the most out of them 
with the least trouble and expense? — ^J. L. Nicholson. 

Among the uses of costs are: 

1. The financial or accounting use, as showing how money was 
expended. 

2. Comparison with estimated results, as in Mr. Emerson's 
method, the discrepancy between estimated and actual results 
being regarded as preventable waste. 

3. The technical use, showing the cost of every process on 
every part, enabling a close check to be made on efficiency of 
production. 

4. Use as a basis for fixing premium or bonus rates. 

5. The commercial use, as a basis of fixing remunerative prices, 
and for selecting that class of product that can be most profit^ 
ably manufactured. — A. Hamilton Church, Eng, Mag., Vol. 38, 
p. 185. 

It is the business of costs to represent facts and nothing but 
facts. 



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USES OF COST. VARIOUS OPINIONS ABOUT COSTS 



121 



The object of cost accounts is to register and record every 
btage and step of production as they actually happened — ^it 
bhould be nothing else. — Ibid., page 184. 

A cost system that represented facts and nothing but facts 
^ould be of little use except to the bookkeeper. It might 
enable him to balance his books and to show that all the 
money expended was accounted for in the records. It mi^t 
show what were the costs for labor and material on each item 
of product, but it could not correctly assign a burden charge 
to each item, for such a charge is based upon something more 
than bare facts, it depends on a theory of the method of dis- 
tribution of burden, and on the application of that theory to 
estimates, which are only approximations, and often very 
rough approximations, to facts. 

The true cost is not what an article is produced for in good 
times, in bad times, or the first time, but what it can be produced 
for in the ordinary average routine of shop practice. — B. A. Frank- 
hn, Eng. Mag., Vol. 42, p. 921. 

The cost of a thing is what has to be paid to get it.* The 
" factory cost " of a manufactured article is what it costs 
the owner of the factory to get the article into the factory 
warehouse under normal shop conditions. It does not 
include the cost of storing and insuring it after it is in the 
warehouse, nor the cost of advertising and selling it. The 
latter are commercial costs, and in the accounting system 
they should be kept entirely separate from the factory cost. 

The cost of idleness of machinery caused by la'*,k of orders, 
failure to get raw material, strikes, or other abnormal cause 
should not be charged as part of factory cost; it should be 
charged to Unearned Burden, or to Profit and Loss. 

The general advantages of any cost system are: 

1. To reduce costs. 

2. To increase production. 

3. To introduce machines to do work hitherto done by hand. 

4. To equalize the output in each department. 

5. To serve as a guide in selling. 

6. To serve as a guide in pricing. 

7. To serve as a basis for judging the product, efficiency and 
diligence of the workmen. 

8. To place the employer in a position to get a safe basis, 
independent of the judgment of the foremen of the different 
departments, on which to reward the efficient and to develop 
the promising but inefficient. 

9. To act as a moral stimulus to every workman and to insmre 
fair distribution of reward to all. 

A coct system will not tell you what your costs should be. It 
will simply tell you what your costs are. 

Costs by themselves mean nothing. We must have standards 
of comparison by which to test their value.— "Efficient Cost 
Keeping," £. St. Ehno Lewis, 3d edition, 1914, published by the 
Burrou^ Adding Machine Co., Detroit, Mich. 

Objects of Cost Keeping. 1. Determination of the price 
at which the product can be offered in the market. 

* One of the difficulties the student meets is the number of different 
meanings and applications of the word "cost." It is both a noun 
and a verb, and as a verb it seems to have a different significance 
when used in the past, present and future tenses. The bookkeeper 
uses it in the pact tense. "What did it cost to get this article into 
the warehouse?" He needs this figure in order to balance his books 
and account for the expenditure. The factory manager wants to 
kDOw "what is this thing costing now; how can we reduce costs?" 
The owner of the factory, "What will this thing cost next year?" 
«o that he can fix next year's prices. 



2. Lessening production costs — ^To attain this the most 
minute attainable subdivision of cost is demanded. 

Production expenses cannot be reduced in gross, but must 
be attacked in small parts. 

The experienced cost-keeper may divide the expense account 
into a hundred or more subordinate accoimts, while the inex- 
perienced one may keep it in a single account or at most divide 
it into a very few heads. Henry Roland, Eng. Mag., Vol. 16, 
p. 47. 

A knowledge of the total cost of a machine is of use only m 
fixing the selling price or in taking an inventory. It is of no 
practical value in reducing costs. The infommtion is too 
general. 

It is impossible, to reduce the cost of a machine to its mini- 
mum figure without first obtaining an accurate knowledge 
of the time consumed in the manufacture of each piece. The 
workman must be offered some incentive. The piece-work, 
premium and different systems * are conducive to this end, 
but should be used after and not before the acquisition of reh- 
able time records. It is necessary to know the cost of every 
operation on each piece. We must adopt some form of job 
ticket.— H. M. Norris, Eng. Mag., Vol. 16, p. 385. 

The cost of any equipment made by the plant itself must 
include its share of burden. 

Installation charges are one part of the cost of a machine. 

Special tools for a particular order should be charged against 
that order. 

The cost of experimental work should be made a deferred 
charge which will not be absorbed until the result of the experi- 
mental work are in actual operation. 

Machines and appliances perfected through experiments 
should be considered as assets, their theoretical value being the 
sum of all the elements of cost that have been inciured in their 
behalf during the cost of the experiments. 

Over, short and damage account. Wastes, shrinkage, de- 
fective work are charged to this accoimt, and it is credited 
with value received for any disposition of the items charged. 
The balance becomes part of the indirect expense. — ^J. L. Nichol- 
son, **Cost Accounting Theory and Practice." 

Controlling Cost Records. Accounts may be kept in the 
general ledger, which should control the various items of pro- 
duction costs. For example, accounts should be kept with 
material, labor, indirect expense, work in process, and part- 
finished stock, entries being made to these accounts in the same 
manner as if they were kept in the factory ledger. — Nicholson. 

Keeping the various items of factory costs in the general 
ledger involves much unnecessary bookkeeping. These 
items should be kept in the factory ledger, and the general 
ledger need have only one account for factory operations, 
charging it with all cash sent to the factory and with invoices 
certified by the factory for payment by the general oflSce, 
and crediting it, at factory cost value, for goods shipped 
from the factory. 

What is "Control" and a "Controlling Account"? 
These words are used by many authorities on accounting in a 
sense that is different from their ordinary meaning. To 
control means to compel, to manage, to restrict. In the 
accountant's sense it means to summarize or to lump together, 
for example, when many expense accounts are kept in the 
cost records their totals are brought together and entered 
in a single Factory Expense Account in the factory or general 

♦ For information on wage systems see F. W. Taylor's "Shop 
Management," F. B. Gilbreth's "Primer of Scientific Management,'* 
and "Motion Study." Gantt's "Work, Wages and Profits," and 
Knoeppel's " Maximum Production." 



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ledger, and this is called a control or controlling account. It 
does not control anything, it only shows the totals of several 
minor accounts of a class. 

It is proper to expect from a cost system : 

1. Final costs; that is the cost of completed units of the 
product at the door of the factory. 

2. Partial costs; the cost of component parts, or costs at cer- 
tain stages of their production. 

3. Comparative costs between one period and another — like 
articles under different conditions. 

4. Costs of operations — direct^labor cost, so that it shall be 
possible to change from day to piece work. 

5. Indirect costs by classes and groups — a basis for the dis- 
tribution of indirect expense. Crude systems with careful 
handling produce better results than elaborate S3r8tems poorly 
run. 

The best plan for factory organization and costs can be evolved 
only after many months and, perhaps, years of painstaking 
development and modifications. 

Cost finding is not merely the work of an accountant, it is the 
work of an engineer, supplemented by the best accounting knowl- 
edge that he can command. 

Costs have no value except in comparison, that action may be 
directed by experience. 

The end of cost keeping is cost reduction. The cost records 
must be made tise of, or they are of no value. — J. N. Gunn, 
Eng. Mag., Vol. 20, 705. 

Cost Securing — gathering details by means of shop order, 
requisition, time cards, etc. 

Cost Compiling — entering the data on proper forms. 

Cost Comparison — placing the latest information beside other 
information. 

Cost Analysis — thought and deduction applied to the cost 
comparisons. — C. E. Knoeppel, Eng. Mag., Vol. 33, p. 172. 

Theories of Costs. Many of the questions about cost and 
value would become simpler if we would give up the idea that 
there is any abstract "cost" or "value," and instead should 
work on the basis that the business of the accountant and engineer 
is to provide data which will enable the executive to take action. 

There is no such thing as an abstract " cost," or if there is it is 
of no use to any one. Sometimes we want to know whether we 
have made or lost money during a given period. In other cases 
we want to know how much our expenses will be increased if we 
put some by-product on the market. In that case we want to 
know only the real extra cost of the by-product. In still other 
cases a factory owner may want to know whether he had 
better shut down his factory for a period, or run it imtil the 
market for the product improves. To answer this question he 
needs an entirely different set of figures than when he is 
deciding whether or not to build a new factory. 

Practically every theory of cost or theory of valuation helps to 
answer some particular question, and we shall continue to have 
new cost theories and new value theories so long as new questions 
are coming up to be answered. — R. S. Hale, Jour. A. S. M. E., 
Feb., 1917. 

It is a fundamental mistake not to check the burden charged 
to cost through the machine rates with the actual burden during 
corresponding periods. Unless this is done, machine rates, 
developed in an effort to secure accurate costs, may be so inac- 
curate as to lose much of their potential value. It is equally a 
mistake to omit the necessary check on any other kind of burden 
methods. If the percentage-on-labor or the man-hour methods 
are used, control should be established to make an accurate 
comparison between the amount of biuxien applied and charged 
to cost and the amount of expense burden actually incurred. — 
Clinton H. ScoveU. 

Many cost systems which have fairly good records of material 
and labor fail entirely in their purpose because they deal so inad- 



equately with the subject of burden. Important elements of 
indirect costs are thrown together in a " general expense " account, 
concealing the leaks and wastes that reduce efficiency and curtail 
profits. Scientific management is never complete unless there is 
developed at the same time an accoimting practice which shall 
adequately reflect for the management the net results of all indus- 
trial endeavor. — Clinton H. ScoveU. 

Interpret the Figures into Actions. The day of guesses is 
past. Knowledge of costs of each article produced or handled, 
of expenses by departments, of the performances of each sales- 
man, of the work turned out by each workman and machine, of 
the stocks on hand, of the gross profits and the net profits month 
by month, are necessary to success. The man who can interpret 
these figures into actions that produce profits is the successful 
manager. But, first of all, he must have the figures. — Charles 
R. Stevenson, General Manager of the National Veneer Products 
Company Factory, Sept. 15, 1916. 

Functions of the Cost Accountant In the past the principal 
function of a cost system, besides indicating a limiting selling 
price, has been to enable those in financial control to criticize 
those operating the factory. These criticisms are usually from 
one to three months late, and are so general in their character 
as to afford, as a rule, no guide whatever by which the superin- 
tendent can be governed. Such a system is too often most highly 
prized for its worst defect, namely, that it enables those in 
financial authority to criticize without taking any responsibility 
whatever for showing how to do better. 

Before we can expect to get any great benefits from the newer 
managerial idea, we must readjust our ideas of the functions of 
the cost accountant, who must become the servant of the operating 
exectUive as well as of the financial executive. 

As long as the cost accountant is simply a critic, he may be 
called "non-productive," but when he furnishes the superin- 
tendent with prompt information which enables him to reduce 
costs he becomes "productive." Promptly detailed information 
of w^hat is being done each day, furnished in such manner as to 
be readily compared with what has been done, and what can 
be done, is the best method of measuring efficiency. — H. L. 
Gantt, Trans. A. S. M. E., 1914. 

The end and aim of cost accounting should be to know not how- 
much a certain order cost for its constituent productive elements, 
but why it cost what it did, and under what conditions the cost 
might be reduced.— F. E. Webner, Eng. Mag., Vol. 35, p. 591. 

The Chief Cost Accountant. A proper head to the depart- 
ment of cost keeping must be as much an engineer as an account- 
ant, and capable not merely of compiling figures, but of using the 
information when the facts are compiled; for the end of cost 
keeping is cost reduction. This man must be so efficient that 
he may be depended upon by the highest official of the company 
and he will naturally be high in the counsels of the latter. . . . 
A man who fills such a position will have no sinecure. — James 
Newton Gunn, Eng. Mag., Jan., 1901. 

The Manager of the Future. Before the cost accountant 
can become efficient the management must become efficient, 
because if the management is not efficient the cost work will not 
be organized and functionahzed so that it can reflect truly, 
adequately and completely the real value of the business per- 
formance. 

The efficient manager knows a cost system to be a means to an 
end, and not an end in itself. 

The systematic manager occupies his time in writing history; 
the efficient manager is writing scientific prophecies. He is 
scientifically determining what is going to happen the day after 
to-morrow. He is systematic, too, but his system is projected 
into the futiure. 

The manager of the futiure will be more of an accoimtant, 
more of an engineer, no matter how much of a financier or sales- 
man he may be. — E. St. Elmo Lewis. 



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USES OF COST. VARIOUS OPINIONS ABOUT COST 



123 



Devi^ng a Cost System. If the work is to be undertaken 
by tike regular office force the ssrstem must be one that they can 
handle. 

The cost accounting must work along the line of least resist- 
ance and begin with as simple a system as possible. This is 
the reason for introducing at first an estimating system, which 
will soon show where more complete methods should be applied. 

There are conditions that remain constant from year to 
year, and when a cost system has obtained the results by de- 
tailed methods for one or two years that part of the system may 
be dropped and the results considered as a constant quantity. 
There is little merit in verifying established data, especially if 
the verification is involved or expensive and can be accomplished 
approximately by other means. 

Whatever kind of system is devised every precaution should 
be taken to avoid making it top-heavy. — Nicholson. 

If the original data of time and material are kept and filed 
by cost symbol or number, then in some lines of business 
the compiling, comparison and analysis need be done for 
one-tenth or one-hundredth of all the data, selecting the 
pieces whose cost is desired to be known; thus greatly de- 
creasing the cost and the complexity of the cost system. 
For example, if it were attempted in a hardware factory 
employing 1000 men or more, and making 10,000 different 
styles and sizes of product, nine-tenths of which are made on 
piece work, by the same processes and machines year after 
year, to have a cost system in which all the original data were 
transcribed to piece cost, group cost and finished product 
cost cards, each with labor, material and burden cost tab- 
ulated, and in which a monthly summation of all these cards 
was made for the purpose of making journal entries for the 
general books, thus tying the cost system to the bookkeeping, 
the Qost of th^ cost system would be so great as to endanger 
the profits of the concern. 

It is not imperalive to record the cost of each individtud machine 
if it is an exact duplicate of others whose cost is known. It is suf- 
ficient that the cost of individual parts or operations be recorded 
so as to note any variation of cost due to changes in the cost or 
in the efficiency of labor or material. — John Sturgess, Eng, Mag.^ 
Vol. 36, p. 940. 

When a new construction is in progress or important altera- 
tions are being made in an existing machine, the manager requires 
the most minute subdivisions of costs, so that he may know in 
what sections of work or in which departments he must seek to 
economize. But at other times when the works are producing 
machines of standard patterns only or executing reproductions 
of previous orders, such subdivisions are not so necessary. It is 
then usually sufficient to ascertain the total on each machine or 
structure so as to insure that it does not exceed a normal amount.. 
— F. G. Burton, ** Engineers' and Shipbuilders' Accounts." 

In the securing of costs in a specific case it is necessary to 
regard: 

a. The character of the enterprise. 

b. The value of the information when secured. 

c. What use should be made of the facts. 

d. The provision in the organization of having the facts used 
as intended. 

e. Whether or not those for whom the facts are intended are 
competent to use them. 

/. Whether through proper inspection there is assurance that 
the facts have been used. 

g. In what degree of refinement should the costs be presented. 
— ^J. Newton Gunn, in Humphrey's "Business Engineering," 
p. 500. 

Unintelligence was and is still exhibited: 



By the lack of appreciation of the vital necessity of having any 
facts used in the operating department capable of proof in the 
final accounts of the corporation or firm. — Ibid., p. 499. 

If by the words " final accounts " is meant the general 
books of the concern, this is an entirely unnecessary " tying 
of the costs to the general books." The sentence should end 
with the words "capable of proof." If the "operating 
department " makes a boiler, for example, all the facts con- 
cerning its cost may be proved by the job tickets and stores 
issue cards, not by the " final accounts." 

Many people believe that costs may be usefully manipulated 
and twisted and arranged so that they cease to represent what 
actually happened but what in the opinion of the manipulator 
ought to have happened. A simple illustration of this is the 
argument, not infrequently met with, that where machine rates 
are in use a job done on a large, heavy planer that could have 
been done on a lighter machine should not be ** penaUzed " 
by bearing the burden incident on a large machine. It would be 
just as proper to insist that where premium work is in use a 
piece of work should always be costed at its lowest rate of pro- 
duction.— A. Hamilton Church, Eng. Mag., Vol. 38, p. 21. 

The " argument " that the job should not be " penalized " 
by the burden of the large machine is a perfectly sound one if 
the costs are to be used as a basis of inventory values or of 
selling prices. If a job for a light planer comes into a shop 
and all the light planers are busy while a heavy planer is 
idle, " eating its head off " with unearned burden, it is advis- 
able to do the job on the heavy planer, but to charge only 
the burden of a light planer which would ordinarily be used 
for the job. Why should a job be " penalized " just because 
the light planers all happened to be busy when it came into 
the shop? 

The following is an example of incorrect reasoning which 
sometimes follows a strict adherence to the machine-hour 
system of distributing burden: An owner of a machine 
shop who had a tabulated hourly burden charge for each 
machine, varying with the size of the machine, the cost of 
running it and the number of hours that the machine was 
expected to run in a year, noticed that a small piece was 
being turned in a very large lathe. He told the foreman that 
he should not use the lathe for that piece because the burden 
charge on it was too heavy, and it would make the piece cost 
too much. The foreman replied that all the other lathes 
were busy and that there was no heavy work on hand for 
the large tool, and he thought he would make the big lathe 
" do something for its keep." The foreman was right, and, 
moreover, the burden that should be assessed against that 
piece in making up its cost, if the cost was to be used as a 
basis for estimating on future orders for similar pieces, is 
not the machine-hour rate of the big lathe, but only that of a 
small one, on which the work would ordinarily be done. 

S3rstems of factory accounting must show not only the cost 
of the product but also indicate the working conditions and 
efficiency of all departments. The manager must have some 
means by which he can check large unnecessary expenditures 
or heavy losses. He should be able to detect increases in cost 
above normal or any unnecessary investments in stock for 
manufacture.—C. U. Carpenter, Eng. Mag., XXIV, 39. 

To make savings of money, service and time, the cooperative 
[accounting] adviser to an executive must be able: (a) To 



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BOOKKEEPING AND COST ACCOUNTING 



distinguish clearly between records which are vital to the future 
policies of a business and those which are merely historical. 

The past in industry as a determinant for policies is of value 
only as it is vitally concerned ixith the future. 

b. To omit many [accounting] refinements that cost much 
money and lead to a ''false and delusive accuracy "; to avoid so 
far as possible doing work that "costs more than it is worth." — 
Dr. HoUis Godfrey, in a paper on *' Application of Engineering 
Methods to the Problems of the Executive, Director, or Trustee." 
In the original the word "engineering" is used where "account- 
ing" appears in the quotation. 

"Tying in" the Cost Records to the General Accounts. 
When the cost records are "tied in" with the general accounting, 
the management has complete control not only over the operating 
expenses of the factory, but over the inventories of raw material, 
work in process, and finished product. 

Cost calculations are sometimes made entirely detached from 
the general bookkeeping, but it is very rarely that such records 
have anything like their full value, and their use is always 
attended by the very considerable risk that they cannot be 
proved by the showing on the financial books at the end of 
the year or other closing period. — Clinton H. Scovell. 

The original entries of factory costs of salable products or 
of betterments are made on job tickets and stores issue 
tickets. Those of auxiliary department costs are made on the 
pay rolls of the several departments for labor and on stores 
issue tickets or store books for indirect material. The burden 
charges to cost of salable products or betterments are made 
on job tickets, on stores issue tickets (for material burden) 
on piece cost cards, or on cost summaries, according to the 
system of burden distribution that has been adopted. 

The costs are " tied to the general books " through the 
journal entries on the factory books: Sundries to Labor, 
Sundries to Cash, Sundries to Stores, Sundries to Burden, 
the Sundries being Work in Process, Stores, Betterments, 
Burden. The cost accounts are balanced or " proved " by 
the total credits to labor equalling the total of the pay rolls, 
by the total credits to Stores equalling the total of the stores 
issue tickets, but this is by no means a " proof " of the 
accuracy of the costs. Their accuracy depends entirely upon 
the accuracy of the original entries on the job tickets and 
stores issue tickets, and upon the correctness of the method 
or theory as well as the clerical accuracy of the distribution 
of burden. Any error in these will be carried forward into 
the general books, where it will remain undiscovered. The 
costs may be tied to the books but cannot be proved by them. 

" Complete control over the operating expenses of the 
factory " cannot be obtained by any system of accounting. 
That is a function of the management which is independent 
of the accounting system. 

With the cost books once established the best modem method 
is to incorporate their record in total in the general financial 
books. The cost books must be interlocked with the financial 
books. 

The cost books contain the data showing the analysis of the 
elements of cost, all of which should be controlled by the finan- 
cial books BO as to permit of a verification of the mathematical 
accuracy of the transactions on the cost records. — Nicholson. 

It is desirable that cost accounts should be based on an elastic 
system, and that while they are built up on the same founda- 
tion and, in general, must agree with the financial books of the 
concern, they should not be interlocked with them. — F. G. Bur- 



ton, "Engineers' and Shipbuilders' Accounts" — ^The Account- 
ant's Library, Vol. XIV. 

WAGE SYSTEMS 

The Bonus Plan. Explained in detail by Mr. Gantt in his 
valuable paper read before the A. S. M. E. in December, 1901. 
Distinctly a system of task work combined with the use of instruc- 
tion cards for the workmen and a bonus for accomplishing the 
task within the time set for it. 

This bonus system of pay has always appealed to me as the 
most easily understood, the easiest to introduce with Httle oppo- 
sition, and the most effective of all systems yet produced. It 13 
adaptable in some forms to almost any other system of pay that 
may be already in existence in the shop. It is the easiest to 
introduce in case the men are working upon the day-work basis. 
Nor is it difficult to persuade the workmen to abandon piece work 
for it in case the reward is made sufficient. I have been intro- 
ducing it into works under my control with marked success. — 
C. U. Carpenter. 

A Ben^actor to the Race. Every cheapening of production 
brings a more than proportionate increase of consumption. 
There is no greater benefactor to the whole race, from a material 
point of view, than the man who, by diligence or inventiveness, 
makes one hour of labor suffice for the work which formerly took 
two. His blessing is like in kind and great in proportion to his 
who makes two blades of grass grow where one grew before. — 
Editorial in Eng. Mag., June, 1900. 

The man who causes one man to cut the grass that two or 
three men cut before is a public benefactor. — W. Kent, 1914. 

The Cincinnati Milling Machine Co., in a pamphlet 
describing its factory, explains its wage system as follows: 

Wages are paid weekly, (a) An hourly rate is established for 
each employee, according to his skill and experience. 

(&) Additional Compensation. We aim to prbvide detailed 
instruction sheets for all operations, which will show in detail the 
method of handling the job to best advantage and with the least 
labor. On this sheet is also shown the normal or standard time 
for the performance of the operation. If this work is done in 
this time, the workman is paid a bonus, which approximates a 
one-third increase in wages. If the work is done in less time than 
the standard time shown on the instruction sheet, the employee 
receives the bonus as above and a prenium in additicn to the 
bonus. If it takes an employee longer than the standard time 
to do the work, he has an opportunity to earn a premium for all 
the time that he saves inside of standard tin:e plus 40 per cent. 
This premium time is also clearly stated on the instruction sheet. 
The above standard time is in all cases reasonably and fairly set, 
and the average man has no difficulty in earning the bonus. 
The time is set with great care and when it is once set, it is never 
changed until the job itself is changed or some change is made 
in the method of performing the operation, or different tools or 
jigs are employed. 

The Flow of Values. The two diagrams, Fig. 6, page 125, 
show a method of illustrating the '' flow of values." The same 
final results are accomplished by each. The total expendi- 
tures for labor, material and burden are all accounted for, 
as shown in the block marked ** Results." The difference 
between the two diagrams is that in the first the total of labor, 
material and burden flows in three large streams into Work 
in Process, while in the second it flows through a great number 
of small streams, through departments, classes, and opera- 
tions, which later are concentrated into a few large streams 
that lead to the total result. We may put flow meters on all 
these smail streams, and their total may equal the total 



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USES OF COST. VARIOUS OPINIONS ABOUT COSTS 



125 



Gr. Company 



Direct 
Labor 



^ 



Cash 



Stores 



Labor 
Direct I lodirect 



5L 



Geo. Charses 



Material 
Direct | Indirect 



Direct 
Material 

7Z~ 



Indirect 
Labor 



Indirect 
Material 



Prime Cost 



zmi 



Burden 



Depts. A B C D 



AAAA . 

1231231231?? ^*^ 



Work-in Process 



Warehouse 



RESULTS 



Betterment 
(Cbff. Co.) 



Goods Shipped 
(Chff. Co.) 



Balances 

In Warehouse 

Work in Process 

' Stores 

Undistributed Burden 

Total Expenditures )ffg"c'o. 




Co'* Gen 
Chargea 

=X[ 



Burden 



Different Methods of 
Distributine Burden 
a Proportional to Cost of Direct Labor 
5 «« *• (t 'i •• Material 

c •• •» Prime Coat 

d ByDepartmenu 
e By Departments and Classes 
f By Classes of Product 

By Machine Hour Rates applied to 
g^ Operations 
1l Plecea 
i Groups 
j Products 



Undistributed 
Burden 



TotaLPrime Cost+Total Burden = Factory Cost 
of Work in Process, distributed as in '^RESULTS'* 



D 



"TyinK the Cost System to the General Accounts'* 



Fig. 6. — Diagrams Illustrating the Flow op Values. 



Co. Cr. 97.400 

Co.Dr.44j000> 
New Cr. Bal. 53,400 | 




Fig. 7.— The Flow op Values. Factoby Ledger. (See page 41.) 



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BOOKKEEPING AND COST ACCOUNTING 



of the meters on the pipes leading from Labor, Material and 
Burden, which agrees with the meter measuring the Results. 
Thus, we have " tied the cost system to the general accounts," 
and we have '^ checked the burden charged through the 
machine rates with the actual burden during corresponding 
periods." It is a great satisfaction to the bookkeeper to have 
done this. It proves that his books are in balance, that he is 
a good arithmetician, that every expenditure has been 
entered and charged to some account, but it does not prove 
the accuracy of the cost accounts. Material and labor may 
have been charged to one article that belonged to another. 
The burden may have been distributed according to a wrong 
system and one product greatly overcharged and another as 



greatly undercharged. The idea that the cost accounts are 
" proved " to be correct by tying them to the general accounts 
is a delusion. 

Diagrams of " flow of values " have sometimes been made 
with figures of the values inserted. They may be of some 
use in explaining to students the theory of accounts, but 
they are of no practical use to accountants. Fig. 7 shows 
such a diagram made from the figures given in the Factory 
Ledger on page 41, and Fig. 8 one made from the General 
Ledger, page 40. On comparing the diagrams with the 
column ledgers it will be seen that the ledgers give all the 
information that the diagrams do, and more, and they also 
give it in a more simple and easily understood form. 



Cap. Stock 

100.000 
Bonds 40.000 



Surplus 
Cr. 10.000 
*• 11.800 
•• 5.000 
Dr 



f 



Dividend 
8.000 



Fct'y R.E. Sc E. 
Bal. 50.000 
2.000 



Cash 

Bal. 25.000 

6.000 

12.000 

40.000 



W 



Res. for Dep. 
: Cr. 15.000 
>Dr. 1.000 



r 



Int.Chffd.Fact'y 

Cr. 5.000 

-<- Dr. 5.500 -* 



Txs. & Ins. 
Dr.Bal. 2.000 

> l.OOOy 



I 1- 



Dis. &Int.- 
Dr.Bal. 1.000 
•» 500 



Profit Sc Loss 
Cr. 5,000 
Cr. 5.500 
-♦Dr. 1.000 

►1.200 

500*- 



Fact.y Opcr'ar 
^ Bal. 60.000 

^*- ► 600 

500 
10.000 
10.000 

♦15.000 

300" 
1.000- 



Adm. & 
Sel. Exp. 
Dr.Bal. 2.000 
,..♦10,000 



Bills Pay 
Cr. 5,000 
—♦3,000 



Cost of Sales 
^—♦4.000 

♦I 1.000 

^ 40.000 



Bau Rec. 



Bal.15.000 
H h-^ 10,000 



Fig. 8. — The Flow of Values. General Ledger. (See page 40.) 



Accts. Pay 

Cr. 20.000 

-— ♦'22,000 



4 



I 



Accts.Rec. 



BaL45,000 
—♦39.000 



Predetermined Costs— Standard Costs. There are two meth- 
ods of ascertaining cost. 1. Ascertain them after the work is 
completed. 2. Ascertain them before the work is undertaken. 
The first is absolutely incorrect, mixing up with costs incidents 
that have no connection with them. Real costs are divided into 
(1) standard costs, (2) avoidable loss. 

There was a railroad shop in which charges were distributed 
with such painful care that the shop sweepers subdivided their 
time to the various locomotives around which they loitered. But 
locomotives, as well as men, can loiter, and one of them stood 
in this shop three months, waiting for a steel deck plate. Being 
familiar with its number the workers charged all the time they 
could not account for to this locomotive, so that at the end of 
three months the total amounted to more than $500. In prin- 
ciple there is no difference between charging an hour of wholly 
wasted time to a locomotive and charging it with two hours of 
time when one hour should have accomplished the work. The 
moment specific wastes of any kind are charged to a definite 
order instead of being charged to some ineflBcIency account real 
costs are vitiated. 

Because costs are not standardized the variations due to 
inefficiency are in the records either increased or lessened by the 
much larger variations due to change of conditions. A job done 
one month under 100 per cent conditions but with 60 per cent 
labor efficiency may equal in (recorded) cost the same job done 
in another month under 60 per cent conditions but 100 per cent 
labor efficiency. 

In one month surfacing a slide valve cost $37.00 and in another 



month $3.65. The object of cost accounting is to record ac- 
curately present (not past) facts, and to facilitate future improve- 
ments. 

"A day's work," "a pound of material," "the performance of a 
machine," should be predetermined in all cases. The difference 
between standard costs and actual costs is the loss due to inef- 
ficiency. 

Allotted costs— standard cost + current wastes. Current 
wastes are predetermined by assuming that they will be 
relatively of the same percentage as for an immediately 
preceding period. — Harrington Emerson, Eng. Mag,, Vol. 36, 
p. 336. 

Defects and Troubles of Bad Cost Systems. The cost 
keeping is usually under the jurisdiction of the bookkeeping 
department who are apt to make too much of a bookkeeping 
proposition of it. 

A manufacturing concern installed two different systems 
within two years, and at enormous expense, and for a long time 
they had costs coming on through three different systems, and 
it was more than three years before they got anything satisfac- 
tory, and then the costs were not as satisfactory for com- 
mercial purposes as the ones they obtained by their original 
system. 

A system should be adapted to the particular needs of the 
business.— W. M. S. Miller, Eng. Mag., Vol. 36, p. 832. 

The systems which failed were: Group Cost, Operation Cost, 
Piece Cost. They involved an immense nimiber of cards and 



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USES OF COST. VARIOUS OPINIONS ABOUT COSTS 



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entries and a delay of from a few days to several weeks before 
any tangible total could be arrived at, and that was not trust- 
worthy. — ^John Sturgess, Eng, Mag.y Vol. 36, p. 940. 

Axioms Concerning Manufacturing Costs. By Henry R. 
Towne, Trans, Am. Soc. Merh. Engrs., 1912. 

Axion 1. Every cost (of a manufactured article) includes three 
fundamental factors, labor, material, expenses. 

Axiom 2. The expense factor should be split into two parts; 
manufacturing, conmiercial. 

Axiom 3. A manufacturing cost has three phases: prime cost, 
stop cost, actual cost. 

Axiom 4. Accurate cost information is vital to good manage- 
ment. 

Axiom 5. Accurate costs imply the correct classification of 
every expenditure. 

Axiom 6. Every production expenditure should be charged 
directly to its proper account. 

Axiom 7. All non-productive expenditures should be properly 
grouped for final distribution. 

Axiom S\ The normal basis for distributing manufacturing 
expense is productive labor. 

Axiom 9. The normal basis for distributing commercial expense 
is shop cost. 

Axiom 10. An accounting system should show results both by 
departments and by totals. 

Axiom 11. A contract product may require a more complex 
accounting system than a stock product for the accurate deter- 
mination of costs. 

Axiom 12. An accounting system should be embodied in a 
code of instructions for the guidance of those responsible for its 
operation. 

Axiom 13. Symbols are better than titles for recording charges 
in an extensive accounting system. 

Axiom 14. Extraordinary gains or losses, in order not to dis- 
tort the statistical value of the annual profit and loss record, 
should be covered into the surplus account between the closing 
of the books for the old year and the opening of the books for the 
new year. 

Axiom 15. Interest on borrowed capital should not be treated 
as an operating expense, but should be charged direct to the 
profit and loss account of the year. 

Axiom 16. Final profits properly signify the amount earned 
on the capital invested. If interest on capital is deducted this 
fact should be stated, and interest shoidd be computed on the 
total capital employed. 

Axiom 17. Terms used to designate profits should indicate 
clearly the stage of profits to which they refer, and should be 
mutually understood. 

Axiom 18. Speculative profits and losses should be segregated 
from those due to the normal operations of a business. 

Axiom 19. A reduction in cost impUes a corresponding reduc- 
tion in inventory. 

Axiom 20. Expenditures in one year which cover the require- 
ments of several years should be distributed over the years to 
which they fairly apply. 

Axiom 31. An annual inventory of all property is indispen- 
sable to accurate knowledge and to good management. 

Axiom 22. Valuation of fixed property should be subject to 
annual review and to fair depreciation. 

Axiom 23. An accounting system should present facts, without 
bias in any direction. 

Axioms are statements of what are supposed to be self- 
e\ndent facts. Some of Mr. Towne's so-called axioms are 
by no means self-evident, and some of them are open to serious 
objection, as below: 

No. 2. Each department has its own expense factor, and 
that of the manufacturing department has nothing to do 
with that of the commercial department. 



No. 3. A manufacturing cost has three elements, direct 
material, direct labor, and expense. The simi of the first two 
is often called " prime cost,'' and the simi of the three is shop 
cost, which is the same as manufacturing cost or factory 
cost. The term actual cost has no well-defined significance. 

No. 7. The modem term for " non-productive " is 
" indirect." 

No. 8. In the best systems of cost-accounting the basis 
for distributing manufacturing expenses is the normal 
machine-hour rate. The cost-of-productive-labor basis is 
the most faulty. 

No. 9. Commercial expenses have no relation whatever to 
shop costs. A shop may make two classes of products, the 
shop cost of each in one month being SIOOO. It may cost 
for selling expenses SlOO for the first lot and SIOOO for the 
second. 

No. 15. Interest on borrowed capital is a financial expense 
which has nothing to do with cost accounting, but interest 
on the whole investment of the factory, whether cash obtained 
by the sale of stock or borrowed money, is a manufacturing 
cost. It should be charged against the factory and credited 
to Interest Earned, or some such account, in the Company^s 
general or private ledger. 

No. 16. Final profits include Interest Earned, Profit of 
the Selling Department, and any other profits, less all the 
losses. They are all finally closed into Profit and Loss, the 
balance of which, for the year, shows the final profits, or losses 
as the case may be. 

No. 21. An annual inventory is not at all necessary if a 
continuous inventory is properly kept, the cards being fre- 
quently checked as the quantities or amounts of the several 
items inventoried are at their lowest stages. 

The above axioms together with these comments were 
submitted to a professional accountant for his opinion on 
them, and he replied as follows: 

" I would avoid axioms as a plague. The thing for the 
cost accountant is to use his own common sense at all times, 
and STUDY HIS OWN PROBLEMS rather than those of 
others. For a clear outline of the whole field let him go to 
some one book such as the present, for general principles 
only.'' 

Subdivisions of Costs. F. A. Parkhurst in his book on 
" The Predetermination of True Costs " subdivides costs 
as below: 



Direct Labor "\ 
Direct Material i 
Administration 
Financial 



Direct CJosts 



True Costs 



Indirect Costs 
Operating 

A better schedule of division is as follows: 

Direct Labor 

Direct Material Factory Cost 

Factory Expense 

Factory Cost \ rp . , « ,.^ 

Commercial Expense / ^^^^ Expenditure 



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Mr. Parkhurst says that he " considers the word cost to 
include all items both direct and indirect, including the 
minimum profit factor." This is an unusual definition of 
cost. The cost of a thing to us is what we have to pay to 
get it. It does not include either our selling expense nor 
any part of our profit that may be made when we sell it. 

Costs of Organizatioiis; of Patents and Patent Litiga- 
tion; of Experiments. There are often some costs incurred 
in connection with a business that are neither factory operat- 
ing costs nor conunercial or selling costs, such, for example, as 
the legal and other expenses of organizing a corporation, 
expenses connected with the ownership of patents, and the 
cost of experiments which may or may not prove successful. 
Accounts for these expenses should be opened in the general 
books, and whether or not any part of them should be charged 
to factory costs of production is a matter for the management 
to determine as is also the question whether they should be 
entirely written off at the end of the year, by charging them 
to Profit and Loss, or carried in the books as assets, a portion 
of them being written off each year. 

The Westinghouse Electric and Manufacturing Co. in 
1917 reported as part of its assets Patents, Charters and 
Franchises, $4,285,206.51, while the General Electric Co. 
carries on its books Patents, Franchises, and Good Will at a 
total valuation of $1.00, WTiting off each year the total 
expenditure upon them. 

Interest on Factory Investment Should be Charged to Cost 

Inflated Inventories. * The most serious objection to reckoning 
interest into costs, in the opinion of some accountants, is that 
to do so " inflates" the value of an inventory. The debate arises 
over the word inflate, for there can be no doubt that, so far as 
a calculation of interest on investment increases cost, it logically 
raises the price at which manufactured goods are carried in 
an inventory. To the present writer this seems no objection 
at all. Seasoned lumber is worth more than green lumber. 
Paper, wines and leaf tobacco are more valuable when properly 
**aged." The cost of this aging process is almost exclusively a 
capital cost. The cost of carrying is an entirely appropriate part 
of manufactiu-ing costs and should be recognized in pricing the 
inventory of finished goods. 

The capital txst of converting rags into paper is just as inev- 
itably an addition to its cost, and just as fair an addition to 
its inventory price as the cost of seasoning or loft-drying the paper. 
The capital cost of converting seasoned lumber into furniture is 
just as fair an addition to its inventory price as the cost of sea- 
soning it beforehand. Frequently a liberal use of capital dimin- 
ishes other costs, and the too meager use of capital increases other 
costs. Interest on investment is the conventional and logical 
way of expressing capital cost. Why isn't one kind of cost as 
good an addition to value as another? There is, therefore, no 
reason why an inventory should not be carried at aU its coat, 
including so much thereof as may be due to interest on the 
investment employed. 

The more carejvUy one considers the varied uses of accurate 
costs the more certainly does he arrive at the conclusion that interest 
on investment should be reckoned as a factor. 

The Rate of Interest. The rate of interest which should be 
charged to cost depends upon the income which the capital 
might be expected to earn if invested in high-grade securities 
where no manufacturing or trading risks are taken. . . . The 

* From Clinton H. Scovell's " Cost Accounting and Burden Appli- 
cation." 



Harvard Bureau of Business Research recommends the use of 
the ordinary interest rate on reasonably secured long-time 
investment in the locality in which the busine&s is situated. 

Interest on investment in a plant is very rarely included in 
the cost of manufacture, but should be in all cases. — ^J. L. 
Nicholson, " Factory Organization and Costs," p. 33. 

Two factories, A and B, are making machine screws. 
A has a small capital, uses low-priced screw-cutting lathes, 
purchases raw material in small lots as needed, carrying only 
a small stock. A's yearly interest on the capital invested 
is only SI 000. B has ample capital, uses modem turret 
lathes and a few automatic screw machines,- purchases material 
in large lots and carries large stocks in order to buj"- at the 
lowest prices. The annual product of B is the same as that of 
A, but it is made at a much lower labor cost, and at a some- 
what lower cost for material. The interest on the capital 
invested, however, is $4000 per year, and this must be 
charged as part of the burden cost of the screws made, in 
order to arrive at their warehouse, or inventory, value. 

Mr. Nicholson, in Journal of Accountancy, Vol. 15, p. 330, 
sa>'s: " The writer firmly believes in the theory that interest 
on capital invested shall be charged to the proper expense 
accounts before ascertaining the actual profit from manu- 
facturing or trading." He quotes Wm. Morse Cole as fol- 
lows: '' Since one of the purposes of accounting is to show 
whether the return is adequate, the interest would seem 
necessarily to be involved somewhere in the accounting." 

F. E. Webner, in his " Factory Costs," says: " The inter- 
est on an investment in plant and equipment, or rent paid 
for the use of a factory, would seem to be almost as direct 
an incident of cost as labor, material, power or incoming 
freight." 

Problems on the Charging of Interest A blast furnace 
in Northern Ohio at the close of the navigation season on the 
lakes has a million dollars invested in a pile of ore sufiScient 
to run the furnace during the next five months. It has half 
a million dollars invested in a storage plant and in the hoist- 
ing and conveying machinery required to transfer the ore 
from the piles to the bins at the furnace. The transporta- 
tion company that brings the ore from Lake Superior has 
its vessels lying idle while the lakes are frozen. A furnace 
in Alabama has its ore delivered directly from cars to the 
ore bins, and never has more than two weeks' supply of ore 
on hand. The northern furnace is handicapped, as compared 
with the southern furnace, by having to charge against the 
cost of its ore the interest on the capital invested in the stor- 
age piles and in the handling machinery; and the transporta- 
tion company has to charge in its cost of freighting interest 
on the cost of its vessels during the whole year although 
they are idle for five months. In this case the cost of idle- 
ness is a legitimate charge against the cost of production. 

A southern warehouseman at the beginning of the cotton 
picking season has a million dollars invested in mortgage 
bonds which pay 6 per cent interest; he also owns an empty 
warehouse and an idle baling plant, costing $200,000 but at 
present earning nothing. He sells his bonds at par and 
buys a million dollars' worth of cotton which he bales and 
stores. Each month that he holds the cotton, it is costing 



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USES OF COST. VARIOUS OPINIONS ABOUT COSTS 



129 



bim S5000, the interest on his bond investment, which he 
charges to the cost of cotton. He also charges to it the 
interest on his investment in the warehouse and baling plant, 
$1000 per month, or $12,000 per year. If he sells the cotton 
in portions of one-tenth of the whole quantity per month for 
ten months, each portion must bear as part of its cost one- 
tenth of the whole interest charge for one year on the plant, 
or $1200, plus $500 per month for the number of months it 
has been held, as its share of the interest on the purchase 
price, whether it is shipped the first month or the tenth. 
If it is shipped the first month the space it occupied in the 
warehouse remains idle until the next crop is stored, and in 
this case the cost of unavoidable idleness, a necessary part 



of the cost of doing a cotton warehouse business, must be 
charged to the cost of the cotton handled. 

Example. If the warehouse is filled October 1st and the 
shipments of each month are billed to the sales department 
at the end of the month at warehouse cost = purchase cost 
+interest+all other expenses, such as taxes, insurance, 
inspection, baling and handling, depreciation of plant, 
superintendence, etc., and that out of the receipts from sales 
(supp)osed to be for spot cash) an amount equal to the sum 
of the purchase and interest costs is reinvested in 6 per cent 
bonds, a statement of the cost of cotton at the end of each 
month for purchase and interest only, omitting the expense 
costs, might be made as below: 



End of Month. 



October. ., 
November. 
December . 
January. . . 
February. . 
March . . . , 

April 

May 

June 

July, 

August. . . . 
September. 



Lot No. 



2 
3 
4 
5 
6 
7 
8 
9 
10 



Purchase 
Cost. 



$100,000 
100,000 
100,000 
100,000 
100,000 
100.000 
100.000 
100.000 
100,000 
100,000 



$1,000,000 



Interest on 

Purchase 

Cost. 



$500 
1,000 
1,500 
2.000 
2.500 
3,000 
3,500 
4,000 
4,500 
5,000 



$27,500 



Interest on 
Plant Cost. 



$1,200 
1,200 
1,200 
1.200 
1.200 
1.200 
1,200 
1,200 
1.200 
1.200 



$12,000 



Rebate of 
Interest. 



$66 

60 
54 
48 
42 
36 
30 
24 
18 
12 



$390 



Purchase 
-H Interest. 



$101,700 
102,200 
102,700 
103,200 
103.700 
104.200 
104.700 
105.200 
105.700 
106.200 



$1,039,500 



Total 

Invested in 

Bonds. 



$101,700 
203.900 
306.600 
409,800 
513.500 
617.700 
722.400 
827.600 
933.300 

1,039,500 



$1,039,500 



Interest on Each 
Lot of Bonds. 



Mos. 




11 


$5,500 


10 


5.000 




4.500 




4,000 




3,500 




3.000 




2.500 




2.000 




1,500 




1,000 



$32,500 



Interest on 

Interest 
Re-invested. 



+ $93.50 
110 

121.50 
128 

129.50 
126 

117.50 
104 

85.50 

62 



$1077.50 



The sum of the interest on purchase cost of the several 
lots, 127,500, and the interest on the several bond invest- 
ments, $32,500, is $60,000, the same as would have been 
received from the original investment of $1,000,000 in 
6 per cent bonds. If greater accuracy is desired, the charges 
against each lot for interest on plant cost may be reduced 
by the figures in the column headed Rebate of Interest, 
representing the money that might be earned by the invest- 
ment of $1200 for periods ranging from eleven months to 
two months. This modification would diminish slightly 
the figures in the succeeding columns. Account may also 
be taken of the fact that each lot of bonds purchased earns 
interest (and the interest may be compounded quarterly) 
as indicated by the figures in the last column. 

Interest and Cost " The Journal of Accountancy has 
consistently maintained that except for the purposes of com- 
parison the inclusion of interest as an element of cost was 
technically unsound and furthermore was unwise from a public 
point of view." (Editorial in J. of A., Vol. 22, 1916, p. 206.) 
The Bureau of Business Research of the graduate School 
of Business Administration, of Harvard University, main- 
tains that interest is an element of cost. It says {J, of A,, 
Vol. 22, p. 209): 

The bureau has come to the conclusion that every business, 
whether or not incorporated, should have a specific charge for 
inteiest on the cost of investment — the amount the capital coidd 
earn if invested elsewhere. No business is truly profitable 



unless it yields the proprietor not only a salary for his time and 
rent for his store, but also interest on his investment. The 
bureau has decided, furthermore, that it is more practicable 
from an accounting standpoint to consider this interest charge 
a part of expense rather than a distribution of profit. 

The Federal Trade Commission's pamphlet on "The 
Fundamentals of a Cost System for Manufacturers '' says 
(/. of A., Vol. 22, p. 213): 

As seasoned material has a higher value . . . the interest on 
the capital locked up during the seasoning forms in a sense a 
direct part of the cost of the material . . . it is impossible to 
get true relative costs unless consideration is given to interest on 
the capital employed. 

Cost accountants and industrial engineers, for comparative 
and statistical purposes, almost unanimously advocate including 
interest in cost, and so far as interest is included in cost for com- 
parative or statistical purposes it serves a usefid purpose. 

Auditors, on the other hand, . . . take the ground that inter- 
est is not an element of cost, and that to include it in cost results 
is an inflation of inventory values and an anticipation of profits. 

It is recommended that where interest on the investment 
is treated as an item of cost that the interest charged to the goods 
be eliminated from inventory values, and that in preparing 
profit and loss statements the amount of the interest charged to 
costs during the period be returned to income under the specific 
caption " interest on investment.'' 

Suppose a furniture factory buys on the first day of the 
year a lot of green lumber for $10,000 and seasons it for 
a year before using it. At the end of the year it has cost 



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130 



BOOKKEEPING AND COST ACCOUNTING 



in addition S400 for storage, insurance and taxes. The 
accountant also adds to the cost $500 for interest, crediting 
Interest on Investment, and it is now inventoried at $10,900. 
The Profit and Loss statement will show no profit on lumber 
but a profit of S500 on interest on investment. If the lumber 
had not been bought, but instead the money had been invested 
in 5 per cent bonds, the profit due to interest earned would 
have been $500. 

Suppose instead of bu>dng the green lumber on the first 
of the year, it had bought it on the last day of the year after 
it had seasoned in a lumber yard. If the price of green 
lumber had not advanced, the seller would charge not less 
than $10,900 in order to cover his expenses, including interest 
on his investment. It is evident that the true inventory 
value of the lumber at the end of the year is $10,900 whether 
it was purchased by the factory on the first or on the last 
day of the year. 

But the Trade Commission recommends that where interest 
on investment is treated as an item of cost " the interest 
be eliminated from the inventory values " and " returned to 
income under the specific caption ' interest on investment.' " 

It is not clear what the expression " returned to income " 



means. It is probably a technical term used by some 
accountants, ha\dng a different meaning than the same 
words when used in ordinary language. There is no " in- 
come " in the case, but only " outgo." If the interest is 
eliminated from the inventory. Lumber account would appear 
as follows: * 

Lumber 



By Int. on Invest., $500. 
Bal. (Inventory) $10,400. 



To Cash (purchase price) $10,000. 
To Expense (storage, etc.), $400. 
To Interest on Investment, $500. 

The recommendation of the Commission is certainly wrong. 
The inventory value is $10,900 instead of $10,400, for it 
cannot be purchased in its seasoned state for less. The 
$500 interest is part of the cost at the end of the year whether 
it was purchased green at the beginning of the year and 
stored in the factory sheds, or whether it was purchased 
at the end of the year after it had been stored in the lumber 
yard of the seller. In the first case the purchaser earns 
$500 interest by investing $10,000 in lumber, and in the 
second hand case he may earn the same interest by investing 
the money in bonds. 



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CHAPTER XIV 
CLASSIFICATION. SYMBOLS. BOOKKEEPING BY MACHINERY 



Classification.* A classification should provide for an orderly 
and logical grouping of subjects which will bring together, more 
or less automatically, in their proper relationship the various 
divisions and subdivisions, and enable the location of any desired 
subdivision quickly and without the need of cross-indexing. It 
must also be flexible enough to permit wide expansion. 

The method of numbering consecutively in one series is the 
extreme opposite of logical classification. 

In working up the classification appended hereto, the writer 
has followed the method developed by Frederick W. Taylor, 
based on the plan made familiar by Melvil Dewey, which is exten- 
sively used in cataloguing books in libraries. The basis of the 
Dewiey classification is the designation by a numeral of each of 
the main or generic groups into which the matter classified is 
divided. 

Mr. Taylor attempted, in endeavoring to classify the expenses, 
activities and products of a manufacturing plant, to use the 
Dewey scheme, but found that it was awkward to be limited 
to ten classes or ten subdivisions, and that there were frequently 
numerical values to be embodied in a symbol, these numerals 
being in danger of being confused with those used to designate 
elates or subclasses. Hence he settled upon the use of letters 
for the classification proper, which has the advantage of per- 
mitting a symbol to be to a great extent mnemonic. While 
Taylor undoubtedly developed to its fullest usefulness the 
mnemonic system of classification, he always referred to Oberlin 
Smith as the originator. 

In using this system we ascertain, by reference to the first 
sheet, showing the main cl^isses, the letter designating that in 
which the subject with which we are concerned would naturally 
fall. Next, we refer to the sheet giving the subdivisions of that 
class, and so on until we get to the elementary subdivision. 

The final test of any classification is use, so the one here- 
with submitted for Machine Shop Practice must not be regarded 
as either complete or final, but only as a starting point from which 
to work. 

PROPOSED TENTATIVE CLASSIFICATION OF 

MACHINE SHOP PRACTICE 

Main Classes 



A Administration, Manage- 
ment and Maintenance of 
Plant and Machinery 

B Building and Yards 

C 

D 

E Employees 

F 

G General—Covering a wide 
range of subjects treated 
in an interrelated manner 

H 

J 

K 

L 

M Machinery (other than trans- 
portation) 



P Power Transmission 

R 

S Materials — Their purchase, 
storage and handling, and 
machinery for hoisting 
and transportation, of 
them 

T Tools and Appliances — 
Their construction, use 
and maintenance 

U 

V Various Features of Ma- 
chine Shop Practice not 
otherwise classified 

W 

X 

Y 

Z 



A Administration, Management and Maintenance op 
Plant and Machinery 



AA Accounting — Costkeeping 

AB Building Maintenance — 
Caring and Cleaning 

AC* 

AD Drawings for Machine 
Shop Use 

AG General — Relating to Man- 
agement and Organiza- 
tion treated as a whole 



AM Maintenance of Machin- 
ery 
AP Planning of Work 
AS Supervision 
AT Timekeeping 
AW Wage Systems 



B Buildings and Yards 



BC Construction — Types 
BF Fire Protection 
BH Heatmg 
BL Lightning 



BS Sanitation 
BV Ventilation 
BY Yards 



E Employees 



ER Record of Employees 
ET Training of Workers — 

Apprenticeship, Shop 

Schools, etc. 



EB Beneficial Associations and 
Other Shop Organiza- 
tions 

ED Discipline 

EE Employment— Selection of 
employees with respect 
to fitness for work 

EH Health Maintenance 



M Machinery (Other than Transportation) 

MP Punching, Stamping and MV Various Machinery not 

Bending otherwise classified 

MT Machine Tools MW Welding 

MT Machine Tools 



MTA Abrasive (Grinding) Ma- 
chinery 

MTB Boring Mills 

MTC Cutting-off Machmes 

MTD Drill Presses 

MTG General — Relating to 
more than one kind of 
machine 



MTK Keyseaters 

MTL Lathes 

MTM Milling Machines and 

Rotary Planers 
MTP Planers, Shapers, and 

Slotters 
MTV Various Machine Tools 

not otherwise classic 

fied 



MTA Abrasive (Grinding) Machinery 



MTAD Drill Grinders 
MTAP Polishing Machines 
MTAT Tool Grinders 
MTAU Universal Grinders 



MTAV Various Grinding Ma- 
chines not otherwise 
classified 

MTAW Emery Wheels — 
Their Construction 
Materials, and Uses 



* H. K. Hathaway, Trana. A. S. Af . E,, 1916. 



*Left blank. In Mr. Hathaway's paper there are numerous 
blank spaces in each subdivision! as in his list of main classes, all the 
letters of the alphabet being used except I, O and Q. The blanks 
are omitted here in order to save space. It is well not to use Z, as 
when written it is apt to be mistaken for the figure 2. 



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BOOKKEEPING AND COST ACCOUNTING 



P PowEB Transmission 



PB Belting 
PE Electrical 
PL Lubrication 



PR Rope Drives 

PS- Shafting — other than 
Countershafts (which 
are included with ma- 
chines) 



S Mahsrials, thbir Purchase, Storage, and Handling, and 
Machinery for their Hoisting and Transportation 



SA Store-room Arrangement 
and Store System 

SH Handling — Transportation 
while in process of manu- 
facture and the imple- 
ments and machinery 
used for transportation 



SM Characteristics of Various 

Materials 
SP Purchasing 
SS Shipping 



T Tools and Appliances, their Construction, Use and 
Maintenance 



TA Tool-room Arrangement 
and Administration 

TC Cutting Tools 

TO Grinding, Lapping and Pol- 
ishing 

TH Holding Devices 

TJ Jigs, Fixtures, and All Spe- 
cial Tools for Duplicate 
Work 

TM Measuring Tools 



TP Punching, Bending and 
Stamping 

TV Vise and Floor Work. 
(Including Erection and 
Assembling and the 
Tools and Appliances 
used in connection 
• therewith) 



TC Cutting Tools 



TCB Broaching Tools 
TCC Cold Saws 
TCD Drilling and Boring Tools 
TCM MilUng Cutters 



TCP Paring Tools 
TCS Slotter Tools. 

than Paring) 
TCT Thread-cutting Tools 



(Other 



Letter Symbols Versus Numbers. Letters for symbols 
have some advantages over numbers. In the first place they 
may be made mnemonic, aiding one to remember the thing 
signified by them. Secondly, fewer characters are needed, 
since numbers are made of only ten digits, to 9 inclusive, 
while 22 different letters (of one style) may be used, omitting 
O, I and Z because they are apt to be mistaken for 0, 1, and 2, 
and Q because it is difficult to make; if two styles are used, 
capitals and lower case, there are 44 available characters. 
The number of different things that may be represented by 
combinations of two, three, and four characters is as follows: 





One 


Two 


Three 


Four 


No. of digits 
No. of lettera: 
One style 
Two styles 


22 
44 


99 

484 
1,936 


999 

10,648 
85.184 


9,999 

234.256 
3,748,0% 



The following is a mnemonic listing of operations in a 
machine shop, the final letter, lower case g, representing 
" ing " or operation and the capital initial letter the first 
letter of the name of the particular tool or operation. 



Ag Assembling 

Bg Boring 

Bw Bench Work 

Cg Centering 



Cpc Chipping 
Cog Cutting off 
Dg Drilling 
Eg Erecting 



Fg Filing 


Rg Beaming 


Fng Finishing 


Sg Shaping 


Gg Grinding 


Slg Slotting 


Hg Helping 


Tg Turning 


Lg Laying out 


Tgr Rough Turning 


Lng Lining 


Tgf Finish Turning 


Mg Milling 


Thg Threading 


Pg Planing 


Tpg Tapping 


Phg Polishmg 


Vw Vise Work 



Nomenclature of Machine Details. (Abstract of a paper by 
Oberlin Smith, Trans. A. S. M. E., 1881;^ 

The requisites for a good S3rstem of names and symbols are: 
1st, isolation of each from all others that did, do, or may exist 
in the same establishment. 2d, suggestiveness of what machine, 
what part of it, and, if possible, the use of said part — conform- 
ing, of course, to established conventional names as far as prac- 
ticable. 3d, brevity combined w^ith simplicity. Of the im- 
portance of Isolation to prevent mistakes and confusion; of sug- 
gestiveness to aid the memory; of brevity to save time and 
trouble, it is hardly necessary to speak. 

To define Terms: "Machine name" and "Machine symbol" 
refer respectively to the name and symbol of the whole machine 
or other article of manufacture; for it will be noticed that the 
system is applicable to almost any products, except those of a 
textile or chemical nature. "Piece name" and "Piece symbol," 
in like manner, refer to the separate pieces of which the whole is 
composed. 

Our system, as finally decided upon, is as follows: Machine 
names and piece names are determined by the designer in general 
according with the principles already pointed out, being, of 
course, made as brief and suggestive as possible, with no two 
machine names alike, and no two piece names alike in the same 
machine. In this nomenclature no positive laws can be followed 
but those of common sense and good English. A machine sym- 
bol consists of a group of three arbitrary capital letters. A 
piece symbol consists of an arbitrary number and follows the 
machine symbol, connected by a hyphen; thus, FPA-2 might 
symbolize the force-pump handle, smallest size. The machine 
symbol may be used alone when required, as FPA. 

As thus described, these symbols fully possess the qualities of 
isolation and brevity. To make them also suggestive, some 
attention must be paid to what letters to use. In practice, we 
aim to make the first two letters the initials of the general name 
of the machine, and the last letter one of an alphabetical series 
which will represent the size of the machine. An example of 
this is shown in the symbol for the smallest-sized force pump 
FPA. If there is any chance of a future smaller or intermediate 
size, gaps should be left in the alphabetical order. This "ini- 
tial" method cannot always be strictly followed, because of such 
duplicates as FPA for force pump and foot press. The remedy 
would be to change one initial for one beginning some synonym- 
ous adjective, that is, foot presses might be symbolized TPA, 
assuming that it stands for treadle press. Usually the least 
important machine should be thus changed. From this it will 
be seen that, in defining the theory of this scheme, the words 
"arbitrary letters" were purposely used. The idea is to make 
the system thoroughly comprehensive. There might be such a 
number of machines having identical initials that the letters 
would be almost arbitrary. In practice, the designer can usually 
succeed in making the symbols sufficiently suggestive. 

In considering how many letters to use in a symbol, considera- 
tion of brevity advised two, suggestiveness three or four. Two 
letters did not allow of enough permutations nor indicate well 
enough the kind and size of machine. Three seemed amply 
sufficient in the first respect, as it provided over 17,000 symbob. 
If, for any reason, in the future four letters should seem desirable, 
the addition of another would not materially change the system. 
If three letters hyphened to a number of one, two or three digits 



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CLASSIFICATION. SYMBOLS.. BOOKKEEPING BY MACHINERY 



133 



should seem bulky, remember that this symbol can stand by 
itself anywhere and express positively the identity of the piece. 
Its comparative brevity is shown by comparing the second and 
third columns of the following table (A). In the different lines 
an idea is given of the application of the system to a variety of 
products not usually made in any one shop. 

Table A 



let 


2nd 


3rd 


4th 


5th 


6th 


1 Full Xame of Machine and Piece 


Our Symbol 


Symbolic Name as 


Characters 


Characters 


Excess of 




for it 


often used 


in Col. 2 


in Col. 3 


Col. 5 
over 4 


6' X4'' Engine Lathe, spindle head 


ELA-4 


Engine Lathe A-4 


4 


13 


9 


No. 4 Power Press frame 


PPD-I 


Power Press D-l 


4 


12 


8 


7" XI 4" Steam Engine, crank shaft 


SEG-51 


Steam Engine G-51 


5 


14 


9 


Buckeye Mowing Machine, left axle nut 


MMD-81 


Monnng Machine 
D-81 


5 


16 


11 


No. 3 Glass Clock, main spring 


GCC-105 


Glass Mantel Clock, 
C-105 


6 


20 


14 


One-Hole Mouse-trap, choker wire 


MTA-3 


Wooden Mouse-trap, 












A-3 


4 


17 


13 









Table B 










FPL 


No. 3 Foot Press 




Weight 




Piece No. 


Same as 


Piece Name 


Material 


Quantity 


Rough 
Weight 


Finished 
Weight 


Aggregate 
Finished 
Weight 


1 






Cast Iron 




220 


200 


200 


2 




Gib 


Cast Iron 




10 


9 


9 


3 




Side Bar 


Cast Iron 




45 


40 


40 


4 




Front Leg 


Cast Iron 




30 


30 


60 


5 




Back Leg 


Cast Iron 




40 


40 


40 


6 




Treadle 


Cast Iron 




17 


15 


15 


7 




Lever 


Cast Iron 




85 


80 


80 


8 


FPH-8 


Lever Weight 


Ca3t Iron 




5 


5 


20 


9 




Pitman 


Cast Iron 




12 


10 


10 


10 


FPH-IO 


Clamp Sleeve 


Cast Iron 




3 


2U 


4H 


21 




Lever Pin 


Steel 




2H 


2 


2 


26 


FPJ-2S 


Treadle and Pitman Bolt 


Iron 




H 


H 


IH 



Table B is a specimen of part of a page of our " Sjrmbol Book," 
in which are recorded any machines which have arrived at such 
a state of perfection and salability as to be marked " Standard " 
on our drawings. 

This table almost explains itself. The piece numbers in the 
first column do not have the letters prefixed, because the latter 
stand at the top of the column. " Same as " means that the 
piece is identical with a piece belonging to some other machine, 
and can be manufactured with it. If it is common to several 
machines in a set, the smallest of the set in which it occurs is 
given. The " quantity " column tells the number of pieces of a 
kind required. The last ** weight '' colunm, added upward, 
shows the total weight of the machine. The piece numbers are 
" gapped " after each kind of material, and also at the ends of 
" groups," as described further on. This is to allow for future 
changes and additional pieces; also that other nearly similar 
machines having more pieces may, in general, have the same 
piece numbers. 

The order in which the pieces are numerici^y arranged cannot 
follow positive rules in all cases. In our list of instructions 
(too long to be here quoted) we direct a classification by materials. 
In each class we group pieces of the same general character, in 
regard to the prevailhig work t9 be done upon them, and in 
natural *' machine shop " orders; i.e., first planing, then drill- 
ing or boring, then turning. We also aim to place the heaviest 
and most important pieces first. Between each group we " gap " 
the numbers. 

Regarding position in naming pieces, we assume a front to 
the machine (where the operator is most likely to be placed), 
and define direction tersely as " forward," " back," *' light," 



"left," "down," "up." The adjectives of position prefixed 
to piece names are, of course, derived from these words, as 
" upper," '* lower," etc. A perpendicular ix)w of similar pieces, 
say 5, would be rated upper, second, third, fourth and lower. 
A number of different-sized pieces of similar name may, in 
like manner, be prefixed smallest, second, third, etc. 

Before closing, a brief refer- 
ence to certain (two) supple- 
mentary symbols may not be 
out of place. One is a small 
letter after a piece symbol (as 
FPL-21-a), signifying that the 
piece is obsolete, the standard 
FPL-21 having been altered. 
After a second alteration, the 
last obsolete piece would be 
sufiixed " b, " and so on. Thus, 
duplicate pieces of old-style 
machines can be identified and 
supplied to customers. The 
other symbol referred to is to 
indicate the number of the 
operation in the construction 
of a piece, and is written thus: 
FPL^21-l8t, FPL-21-2d, etc. 
Its use is of great value on 
detail drawings, time cards and 
cost records. 

A good system of symbols 
must have four qualities: 

1. Simplicity combined with 
efiiciency. 

2. Definiteness — just one 
S3rmbol to one thing, and one 
thing to one S3rmbol. 

3. Mnemonic quality; that 
is it should be capable of being 
easily remembered. 

4. It must be brief. 
Here is a choice specimen 

from a catalog: "Lower left- 
hand-cutting blade - set-screw- 
lock-nut"— a full-blooded linguistic dachshund.— C. B. Thomp- 
son. 

Record of Equipment A method of keeping track of 
every piece of equipment in a power plant is shown by W. 
Sailes, in Pouoer, March 21, 1916. It may be used as a 
model for the record of all the machinery in a factory, giving 
the original cost, present valuation, condition, performance, 
and cost of upkeep of each particular machine. The record 
is kept on cards, like WSl, classified in groups and filed in 
one or more cabinet drawers, as shown in Fig. 9. 



Class No 

Service 

Special Data: 

Maker 

Date of Purchase 

Price Delivered 

Blue Print No 

List of Repair Parts 

Nearest House carrying Repair Parts . 

Performance Guarantees 

Accessories: 



Location 

Method of Operation . 



Purchased through. 

Date Installed 

Cost Installed 

Mfrs. Serial No 



Kind 



Purchased from 



Date 



Price Cost Installed 



FoBM WSl. — ^Record of Individual Equipment. 



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134 



BOOKKEEPING AND COST ACCOUNTING 



Record of Repairs, Inspections, etc. 
Date Report of Details 



New Parts or Material Used 



Class and No ^^^^ Valuation of all tools at the beginning of any year; 

(9) the total valuation of all tools at the close of any year. 



Total Cost 





Initial Cost 


1915 


1916 


1917 


1918 


1919 


1920 


1921 


1922 


1923 


Inventory 
Value 


Main Unit ($ ) 





















AccessorieH (I ) 










Total Valuation 















Notes: 



(Reverse of Card.) 



Fig. 9. — Method of Indexing and Fiung Cards. 

Mr. Sailes says: " The first step in a complete power-plant 
record should be the identification of every piece of equipment 
in the plant, and the establishing of a record of its cost, upkeep, 
performance, etc., thereby simplifying the matter of keeping a 
schedule of the present valuation, condition, capacity and cost 
of upkeep of each particular machine. This system of identi- 
fication also prevents confusion when giving instructions con- 
cerning any particular piece of equipment. 

'* One of the best methods is to classify all power-plant appa- 
ratus into, say, three main groups: (1) Steam Generating; (2) 
Power Generating; (3) General Maintenance." 

Plant Inventory. Mr. H. M. Norris designed the two 
forms shown below for keeping a continuous record of the 
machine tools in a shop, with their original cost, cost of 
installation and of repairs, depreciation, and appraised value 
in different years. The forms are 4x6 in., and have a 
margin for filing in a loose-leaf book. 

Mr. Norris says: " The book accomplishes nine distinct 
objects. It shows: (1) just what tools have been made for 
each machine; (2) the date when each was made; (3). what 
each cost; (4) the total valuation of the tools added each 
year; (5) the amounts by which each has been depreciated; 
(6) the year in which said depreciation was made; (7) the 
amount by which the full set has been depreciated; (8) the 



STANDARD PLANT LEDGER 

Machlna No. 3 Plain Miller 


Maker Gin. MlUlaff Machine Co. Cost $ 850i 


Location: Floor t Row 2 No. S 




EsUmated Life 15 Yrs. 


NeworS.H. New 


Prob. S«llinc Value: $ 188. 


WelKht 3100 Pounds 


Req'd Rate of Dep'n S i 


91 


598 


9S 


895 






|| 


1 










9S 


650 


97 


413 




















W 


508 


98 


4S0 


















94 


416 


99 


SM 








1 












95 


<£9 










1 1 












LosMS, Repair* or Additions Tendinc to NeutraliM oc 
Augment Depreciation 


Description 


Order 


Date 


Credit 


Dcbll 




Wti 


12 


15 


96 


50 


0. 






Rack Attachment 


Sold 


3 


6 


97 






.. 


00 




2742 


8 


14 


<. 


80 


00 






ifi additional lines) 




































For Cost of Inetailatlon and Ust of AttachmenU 
See Reverse Sid* 



Form N1. Inventory op Toom. 



SPECIAL PLANT LEDGER 

Tools for No. 1 Radial DriU Symbol «4 


Mark 


Made 


Cost 


===== 
Total 


1890 


1891 


1892 


1893 


6A1 








25 
























" 2 








15 








5 
















" 3 








30 




70 




















•• 4 




1 


90 


48 


50 




















= 


" 5 









6 


75 






















" S 


7 


15 




10 


25 


05 


50 






10 


25 








9 
S 


" 7 


I 


3 


91 


8 






















^- 


<' 8 




7 




5 


59 










1 


50 






3 


u 9 




9 




10 


2a 


23 


75 














\l 






























1* 






























1 






























I 


Valuation in January 


70 


00 


ISO 


50 


112 


50 






Shrinkaga During Yaar 


5 


00 


11 


75 










Valuation in December 


05 


00 


118 


75 













Form N2. Reverse op N1. 

" Instead of havmg to go over, and revalue, from one to 
two thousand special tools every year, it is necessar>' only 
to note what tools have been rendered obsolete since the last 
inventory, the entries being made by the chief draftsman at 
the time of making the alterations in the corresponding 
drawings and patterns which destroyed their usefulness." 



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CLASSIHCATION. SYMBOLS. BOOKKEEPING BY MACHINERY 



135 



Each individual machine in- a group should carry its own 
particular designating letter and number. For instance the 
subdivision might be made as follows: 

STEAM-GENERATING EQUIPMENT, " S " 



Boilers B 

Stokers S 

Blower Eqmpment D 

Coal and Ash Equipment A 



Economiaer HE 

Water Meter WM 

Boiler-Feed Pumps FP 

Water Softener W 



.SM 
.GM 



Coal Weigher CW Steam Meter 

Ash Weigher AW Gas-Analysis Outfit. 

Feed-Water Heater H 



POWER-GENERATING EQUIPMENT, " P " 

Turbines T Condensers C 

Engines E Condenser Air Pumps CPA 

Geoerators G Condenser Water Pumps. . . CPW 

Exciters GE Condenser Circ. Pumps CPC 

GENERAL MAINTENANCE. " M " 

Cranes CH Air Comproraors AC 

Fire Pumps FP Elevator Pumps. PE 

In a plant having eight boilers, the designation would be 
Sb-1 to Sb-8. If there were three turbines the designation 
would be Pt-1 to Pt-3. Cranes would be designated as Mch-1, 
etc. 

Wherever possible a standard form of lettering, as well as 
color, should be used. 

BOOKKEEPING BY MACHQSTERT 

Bookkeeping Machines. Are you still paying large salaries 
for dips into inkwells, "flourishes," blottings and ink-spots — 
for illegibility, mistakes and erasures — for brain additions and 
subtractions, late statements and trial balances freighted with 
trials? 

Why? — ^when a bookkeeping machine will substitute neat 
readable type-printed entries, machine-accurate figuring — will 
save hours of time daily, keep each account in daily balance, 
prove postings daily, get statements out on the first, and re- 
duce trial balances to a mere formality? — (From an advertise- 
ment in System), 

The great advance in bookkeeping methods made in the 
last thirty years consists chiefly in getting rid of the labor 
of making pen-and-ink entries in large books, and of trans- 
cribing from one book to another, and of "brain additions 
and subtractions." The means by which these advances 
have been made are: cards; loose-leaf books; carbon 
paper; typewriting machines; mimeograph and other 
duplicating machines; cash registers; filing cases and cab- 
inets, wath their folders, flags and indexes; index racks; 
adding machines ; calculating machines ; tabulating machines ; 
photostats; addressing machines. Descriptions of these 
nimierous devices are unnecessary here, as most of them 
are well advertised, and those interested may obtain, by 
writing to their manufacturers, illustrated circulars describ- 
ing them. Following is a list of several leading manufacturers, 
taken from the advertising pages of System. 

Baker- Vawter Co., Benton Harbor, Mich, and Holyoke, Mass. 
Filing systems, steel ledger and statement tray. 

Burroughs Adding Machine Co., 217 Broadway, New York. 
Figuring and bookkeeping machines; ledger-posting ma- 
chines; 98 machine models. 

National Cash Register Co., Dayton, Ohio. Cash registers; 
credit files, "cuts out all bookkeeping of customers' accounts." 

Dalton Adding Machine Co., Norwood-Cincinnati, Ohio. 
Adding and calculating machine. 



Stickney and Montague, 54 Franklin St., New York. "Dir«x- 
All" addressing and listing machines. 

Wilson-Jones Loose Leaf Co., 3021 Carroll Ave., Chicago. 

Loose-leaf systems and binders. 
Cincinnati Time Recorder Co., Cincinnati, Ohio. Clock 
records and time keepers. 60 models. 

Graphic Duplicator Co., 228 West Broadway, New York. 
Duplicating machines. 

Elliotl^Fisher Co., Harrisburg, Pa. Bookkeeping machines. 

International Time Recorder Co., Endicott, N. Y. Time 
recorders, 250 styles. 

The Rand Co., North Tonawanda, N. Y. Visible mdex, 10 
styles. 

John C. Moore Corporation, Rochester, N. Y. Loose-leaf 
forms and binders. 

Stromberg Electric Co., Harvester Bldg., Chicago, 111. Time 
recorder for cost keeping. It records on the job ticket the 
starting and stopping times in hours and decimal fractions, 
automatically deducting the dinner and other non-working 
periods. Electrically operated recorders controlled by 
a master clock. 

The C. J. Root Co., Bristol, Conn. Automatic counters. 

Kalamazoo Loose Leaf Binder Co., Kalamazoo, Mich. Loose- 
leaf devices and accounting systems. 

The A. W. Shaw Co., Chicago, 111. Correspondence course in 
retail merchandising and stores records. 

Addressograph, 910 W. Van Buren St., Chicago. Addressing 
and listing machines. 

Duplicator Manufacturing Co., Chicago, 111. DupUcating 
machines. 

Marchant Calculating Machine Co., Oakland, Cal. 208 Broad- 
way, New York. 

The Automatic Time Stamp Co., 158 Congress St., Boston, Mass. 
Time stamps. 

The Elliott Addressing Machine Co., Cambridge, Mass. Hand, 
foot and electric addressing machines. 

Mailometer Company, Detroit, Mich. Machine for sealing, 
stamping and counting envelopes 250 per minute. 

Alvah Bushnell Co., 925 Fill^ert St., Philadelphia, Pa. Vertical 
file pockets. 

Art Metal Construction Co., Jamestown, N. Y. Steel filing 
cabinets. 

Chas C. Smith, Exeter, Neb. Index tags and signals. 

W. A. Morschhauser, 1 Madison Ave., New York. Calculat- 
ing machine. 

Felt A Tarrant Mfg. Co., 1733 N. Paulina St., Chicago, lU. 
"Comptometer" adding and calculating machine. 

A. B. Dick Co., Chicago and New York. Edison-Dick mimeo- 
graph. 

The J. C. Hall Co., Providence, R. I. Voucher check sys- 
tem. 

Commercial Camera Co., Rochester, N. Y. The "Photostat," 
for copying cost sheets, vouchers, statements and ac- 
countings. Copies direct on paper in a few minutes. Write 
for the Photostat book. 

The Zenith Systems Corporation, Tonawanda, N. Y. Card 
filing system, visible index. 

The Hollerith Tabulating System, which was first used 
in compiling the records of the U. S. Census of 1890, is now 
extensively used by large manufacturing concerns for lessen- 
ing the labor of accounting and cost finding. The following 
description is taken from circulars of The Tabulating Machine 
Co., New York City. 

The essence of the Hollerith System is the preparation of a 
slip, or card, to represent each transaction (or essential par- 
of a transaction) in such a form that these slips can after- 
wards be sorted out upon any desired basis of classification, 
and that each group — having been so sorted — may be added, 



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136 



BOOKKEEPING AND COST ACCOUNTING 



80 as to show the total effect of this group of transactioDS 
under any desired number of headings. 

The " System " consists of three machines: The Puncher 
(Fig. 10), the Sorter (Fig. 11), and the Tabulator (Fig. 
12). 

The Puncher is operated somewhat like an ordinary 
typewriter, but, being simpler, can be worked more rapidly. 
Its purpose is to cut perforations in cards (Fig. 13), so as to 



enable the other two machines to ** take hold of "-them. All 
cards for use in the standard machines are uniform in size 
(7|X3i in.); but the headings given to the various columns 
may be varied to suit particular requirements. The top 
right-hand corner of the card is cut off, to ensure that all 
cards are placed in the machines the right way up. 

The card has 45 vertical rows of figures (letters are some- 
times used in some of the columns). 



Fig. 10. — The Puncher. 



Fig. 11. — ^The Sorter. 



Fig. 12. — ^The Tabulating Machine. 



When cards are being punched in series many consecutive 
cards may require to be punched identically in (say) the 
first nine or ten columns. To save time, a " Gang Punch '* 
is often employed for this purpose, which can be rapidly 
" set " by the operator to any desired combination, and will 
punch cards a dozen or so at a time. Punching is not highly 
skilled work: boys or girls soon learn to punch cards accuraiely 
at the rate of 250 per hour. Each card represents a " trans- 
action." 

The Sorting Machine (Fig. 11) is worked by electricity 
from an ordinary lighting socket. By its aid anyone can sort 
cards at the rate of about 15,000 per hour. The operator 
sets the pointer of the machine against the column repre- 
senting the basis upon which the sorting is to proceed, and the 
machine does the rest. The cards are placed vertically in 
position on the table of the machine in batches, and in due 
course find their way into one or another of the receptacles 
chown one above the other in the lower part of the machine. 



Cards not perforated at all, which may have been included 
by mistake, are also sorted out automatically. If the sorting 
basis consists of more than one column of figures the cards are 
first sorted for the hundreds column, then each hundred 
group must be sorted according to the tens column, and sub- 
sequently according to the units column. Operating at a 
speed of 15,000 per hour, it is not a lengthy process. 

The Tabulating Machine (Fig. 12) is also worked by elec- 
tricity. It takes the cards sorted out into groups by the 
preceding process, a group at a time, and shows — in as many 
columns as may be required — the total of any desired col- 
umns thereof in tabulated form. Fig. 12 model shows five 
tabulated di\isions. The machine will classify about 9000 
cards per hour. 

The sectional totals must, of course, be taken off the 
Tabulating Machine by hand, and built up into daily totals. 
An effective check is secured by agreeing the " daily " totals 
arrived at upon one basis of sorting \iith the " daily " totals 



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CLASSIFICATION. SYMBOLS. BOOKKEEPING BY MACHINERY 



137 



arrived at by another basis of sorting; but there is no limit 
to the number of different ways in which the same series of cards 
may bebuilt up into daily totals — each, of course, showing a 
different basis of classification. For illustration, the daily 



Depmc 

THE PENNSYLVANIA STEEL CO. 


Man's 

No. 






10 




Date 

Dec. 22 






TluMStmrtad A.M. 7 
Name ^fcU^X>oC 


P.M. ^ ^'^ 


TtaM 'Na. 


Ordar No. 


Bub. 


Chargo 


IUob.!f«k«r 


Do not writ* bare ] 




}"*•, 


Time 


Rate 


Coat 


1 


/O 


T" 


^/y/2o 


Of 


ZH9 


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2.7i: 




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OH 


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fi,L'f 










27* 


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^" 


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f>n/v0 


o9 


Si^ 


fS^-Z 










V' 


3 





A So 


9 


^iy/xo 


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b'oif 


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IV 


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ISO 


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(0 sy/iy 


ol 


7X4 


fH^-f 










17' 


/ 


y 


^.60 


g 


fc^yzio 


07 


^oB 


iOl't 










17* 


/ 


y 


6 


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^1.79 


y-v 




— I 
















1 








lUportcd on thU CanI Dally 




P.M. 


A.M. 


Tout 


A.M. 


P.M. 


Total 


Niffht 

or 
Overs 
Time 


In 


Out 


la 


Out 


Day 


In 


Out 


In 


Out 




1 Ur 


31 1» { 


1 1» X 


lS8 




Time 















FoRM PSl. A Specimen Time Card of the Machine Shop. 



total of " Sales " may (if desired) be built in many different 
ways — all, perhaps, equally useful, although not all equally 
usual — .e.g, Customers, Departments, Code Numbers of 
Goods sold. Salesmen's Numbers, Districts (Customers' 
addresses). Customers' occupations, etc. 

The use of the system in the Steelton plant of the Penn- 
sylvania Steel Co., according to an article in the American 
Machinist^ showed three major advantages: L Reduced ex- 
pense of cost accounting, from a reduction in the office account- 
ing force and the almost entire elimination of night work. 
2. Lessening of time in preparing the cost statements; before 
installing the system the average day on which the statements 
were received by the comptroller was the 15th of the month; 
the date now ranges from the 5th to the 7th. 3. Distribution 
analyses in great detail; formerly 27 classes of product were 
analyzed as regards cost, now 130. 

Form PSl shows a specimen time card (here reduced in 
size) of the Machine Shop, and Fig. 13 the tabulation of 
the first order, No. 684,120. The time card, it will be noted, 
has seven jobs on it for one man on one day, and with the 
tabulating system it is not necessary to issue a separate job 
ticket for each job. 

Form PS2 shows a requisition on the storekeeper, and Fig. 
14 the corresponding card by which all the data concerning 
the stores issue are tabulated. 



1 

2 

3 


I 

•J 



MnSf*. 

• 09 


PWOM 
• 


Ord 




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09 


SuU 

• 


I 




udOott 




MMhfawA 
I 







HMt 

• 


■ 
• 


f 

X 
• 


htniM 



• 


Labor 








4 

5 

86 


1 1 

• • 

3 3 


1 • 1 

2 2 2 

3 3 3 


1 1 

2 2 

3 3 


1 1 

2 2 

3 3 


1 #1 1 

2 2 9 2 

3 3 3 3 


1 • 

2 2 

3 3 


1 1 

2 2 

3 3 


^ 1 1 

2 2 2 

3 3 


2 2 

3 3 3 


• 

2 
3 


1 1 

2 2 

• 


1 
2 
3 


1 
2 
3 


1 1 

2 2 

3 3 


1 
2 
3 


1 1 

2 • 

3 3 


1 

• 
3 





"7 
8 
9 


4 
5 
6 


4 4 4 

5 5 5 

6 6 6 


4 4 

5 5 

6 6 


4 4 

5 5 
• 6 


• 444 

5 5 5 5 

6 6 6 6 


4 4 

5 5 

6 6 


4 • 

5 5 

6 6 


5 5 5 

6 6 6 


4 4 4 

5 5 5 

6 6 6 


4 
5 
6 


4 
5 
6 




4 
5 
6 


• 4 
&• 
6 6 


4 
5 
6 


4 4 

5 5 

6 6 






10 
11 

• 


7 
8 
9 


7 7 7 

8 8 8 

9 9 9 


7 7 

8 8 
9# 


7 7 
9 9 


7 7 7 7 

8 8 8 8 

9 9 9 9 


7 7 

8 8 

9 9 


7 7 
• 8 
9 9 


7 7 7 

8 8 8 

9 9 9 


7 7 7 

8 8 8 

9 9 9 


7 
8 
9 


7 
8 
9 




7 
8 
9 


7 7 

8 8 

9 9 


7 
8 
9 


7 7 
• 8 
9 9 




/ 



FiQ. 13. — ^Tabulating Machine Card Corresponding with Item 1 op Form PSl, 



REQUISITION ON STOREKEEPER \Ji 
Storekeeper iJW/S'OS Secrion ^ Date 


Order No. 


I 

M 

1 
\ 

s 

Q 


^ 






1 


WaicMor 
Uuatlty 


Description 


For Ofn«j 


^ Use Only 


Ualt 


PrkM 


ValiM 




/» 












hyyiQyiiJ, 7v:/u£j2^ 












C 










< 






























7 8 ¥.0-6^^ /^ 






V 


33 






































n 

5 1 
* 1 


1 




1 
1 






































Signed 


n.PM..rlr»»BMO.. 


Q 


1 



Form PS2. — Requisition On for Storekeeper. 



Digitized by 



Googte 



138 



BOOKKEEPING AND COST ACCOUNTING 



1 

2 

3 


19 2 4 6 8 
• 1 1 • 5 7 9 


X 


Cndtt 

• 


GtaM 




• ••0 


• 


• 




• •• 





I 





• •••0 00 


4 
5 

rv 

^ 6 


1111 

2 2 2 2 

3 3 3 3 


* "^ 1 1 1 1 1 
B I 2 2 2 2 • 
° " 3 3 3 3 3 


A K 

B L 
C M 


11111 

2 2 2 2 2 

3 3 3 3 3 


1119 

2 2 2 2 

3 3 3 3 


Di Pt 
OrQt 


1111 

2 2 2 2 

3 3 3 3 


1111 

2 2 2 2 

3 3 3 3 


1 1 

2 2 

• • 


-^7 
8 
9 


4 4 4 4 

5 5 5 5 

6 6 6 6 


*> « 4 4 4 4 4 
^ "^ 5 5 5 5 5 
^ » 6 6 6 6 6 


D h 
B P 
F ft 


4 4 #4 4 

5 5 5 5 • 

6 6 6 6 6 


4 4 4 4 

5 5 5 5 

6 6 6 6 


0« 01 
U Pk 
t Cd 


4 4 4 4 

5 5 5 5 

6 6 6 6 


4 4 4 

5 5 5 5 

6 6 6 6 


4 4 

5 5 

6 6 


^ if 


10 

11 

• 


Till 

8 8 8 8 

9 9 9 9 


"" ^ 1 1 1 1 1 
" * 8 8 8 8 8 
' "99^99 


U b 

a T 


• 7777 
8« 8 8 8 
9 9 9 9 9 


7 7 7 7 

8 8 8 8 

9 9 9 9 


LF 
8P 

VA 


7 7 7 7 

8 8 8 8 

9 9 9 9 


7 7 7 7 

8 8 8 8 

9 9 9 9 


7 7 

8 8 

9 9 


7 ' 
8 

V 



Fig. 14. — Machine Cakd Punched to Correspond to Form PS2. 



AaElapsed-time RecordingMachine is made by the Bishop 
Calculating Recorder Co., Wool worth Building, New York. 
On starting a job a card is inserted in the machine, which 
cuts a notch in the edge of the card. When the job is finished 
another notch is cut, and the time-controlled mechanism 
is so arranged that the second notch always shows a direct 
reading of the elapsed hours. The noon hour and non- 
working periods are automatically subtracted. By placing 
the notched card on a " wageometer," a form of wage table 
made by the company, a direct reading of the amount due 
the workman is at once shown. A tabulating machine may 
be used in combination with the recorder, to sort the cards 
automatically by man, job or operation number and to com- 
pile the amounts. 

The Periodograph, made by Gisholt Machine Co., Madi- 
son, Wis., consists of a master clock and a panel board kept 
in one of the offices of the factor}' and a number of time- 
stamping registers which are placed in convenient locations 
throughout the shops. A unit of time, usually a tenth of 
an hour, is called a j)eriod, and the periods are counted con- 
secutively through the working hours of the day, week or. 
month that the shop runs, non-working hours being auto- 
matically omitted. A job card is issued for each job and the 
card is stamped with the periods at which the job is started 
and finished. The difference is the number of periods the 
man worked on the job. The printing on the cards varies 
with the kind of work done and with the system of shop 
accoxmting in use. Form PR is a sample of a card used in a 
machine shop. It shows that man No. 187 started on order 
1271X July 6, period 412, but was stopped at period 443. 
He started again at period 475 on the same day and worked 
continuously to period 857 July 10, when the job was 
completed. 

Another form of card contains spaces for the following 
information: Name and number of workman; piece name and 
number; operation name and number; machine number; shop 
order number; number of pieces; number spoiled; number 
defective; setting up time allowed; time per piece allowed; 
time each; stopped; completed; total time, hours; labor 
cost; premium; total labor cost; Inspector's OK and date; 
also six spaces similar to those in Form PR for the clock 
stampings and the entry of the period differences. 



X/;; r-::g-g^ \ 



o«o»i.No. /;^7(6^ \»/f^300JY- 



?$<y/^^^cuu^ 



1 Bench Work 

2 Blackamlth 

3 BoltCuttiiig 
-*- Boring MUl 

5 Cutting Off 

i Drill Preu 

7 Erecting 

S Geer-Cuttlng 

' Grinding 

1* Helping 

11 Hydraulic Press 

U Kcyscadng 

13 Lathe Work 

14 iTNMlllIng 

15 WPlanhig 
U /^Repairing 
17 O'SawIng 
1« O^iotdng 
19 V->'Shaping 
2t /^Tapping 

21 Vw/Teating 

22 Turret Lathe 



Change Card When You 
Change Jobs 

KEEP CARD CLEAN 

PUT IN RACK AT 
NOON AND NIGHT 



Jul 
Jai 



Jul 
Jul 



MS 

412 



38^Z 



3/ 



Total 
Periods 



Cost 
Labor 



¥/3 



Shop 
Ex. 



/2.39 



/¥.¥S 



Stopped 



Adftmson Machine Co. 



Coa»le|cd 



Coa»le|i 



Fonn PSJ 



Iuojji apis 811UL 



Form PR. Periodograph Card. 

The Monroe Calculating Machine is an adding and calculating 
machine the three principal parts of which are a standard flexi- 
ble adding machine keyboard for setting up the numbers to be 
added, subtracted, multiplied or divided, a crank at the right of 
the keyboard for performing the operations, and a carriage at 
the top of the machine holding the dials which show the 
results and the proofs of the operations as they are performed. 

The main crank operates in either direction, forward or clock- 
wise for addition and multiplication, backward or counte^ 
clockwise for subtraction and division. There are two stopping 
places, after a forward turn stop at the upper position, after a 
backward turn stop at the lower position. Automatic locks 



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CLASSIFICATION. SYMBOLS. BOOKKEEPING BY MACHINERY 



139 



provide against operating errors which might result if the turn 
is not ended at the proper position. 

The machine is made by Monroe Calculating Machine Co., 
Woolworth Building, New York. The following examples of 
its operation are taken from the " Instruction Book." 

Addition, 325+456+222 = 1003. 

Set the automatic release key with the arrow pointing to the 
right. See that the dials are clear. Set 325 on the keyboard 
at the right and turn the crank forward a full turn to the upper 
position registering 325 in the lower dial. Set 456 on the key- 
board and turn the crank forward again; this adds 456 to 325. 
Set 222 on the keyboard, turn the crank forward once more, 
repstering the result 1003 in the lower dial. 

Subtractum, 1003-445 = 558. 

At the end of the preceding example 1003 appears in the lower 
dial; to subtract 445 from it set 445 on the keyboard, turn the 
crank backward a turn and a half to the lower position and the 
answer, 558, appears in the lower dial. 

MuUiplication. 4346X122 = 530,212. 

Turn the crank forward two turns, stopping at the upper posi- 
tion. With the carriage shifting lever shift the carriage one 
position to the right and make two more turns. Shift carriage 
again and make one turn. 

The three successive steps register in the result dials as follows: 



I at Step 



2d Step 



3d Step 



00000002 
00000008692 



00000022 
000095612 



00000122 
00000530212 



Upper Dial 
Lower Dial 



DwUdon. 477591 ^224 =2132; remainder 23. 

Set the dividend 477591 in the keyboard and by one turn of the 
crank forward register it in the lower dial. Clear the upper 
dial and the keyboard, set the divisor, 224, in the keyboard 
and shift the carriage 3 spaces to the right so as to bring the 
divisor 224 directly under the 477 of the dividend, the first posi- 
tion for dividing. 

Turn the crank backward, subtracting 224 from the first three 
figures of dividend (477) as many times as it can be subtracted, 
that is twice. The red 2 in the upper dial indicates the first 
figure of the result, as shown under 1st step below, 

Shift the carriage one space to the left, again subtract the 224 
as many times as possible from the three figures of the dividend 
that appear immediately above it, that is, once. See 2d step. 
Continue this shifting and subtracting until no further sub- 
traction can be made. 

The figures as they show up on the machine at the end of each 
step are as follows: 



Ist Step 



2d Step 



3d Step 



Last Step 



OOOOfOOO 
0000029591 



OOOOfiOO 
000007191 



000Q;?/50 
000000471 



WXMBISS 
000000023 



Upper Dial 
Lower Dial 



The instruction book shows numerous examples of the solu- 
tion of special problems and of the use of various " short cuts," 
such as multiplication and division of decimals, shortening 
multiplications, taking off discounts and chain discounts, 
accumulative multipUcation, use of reciprocals, prorating, 
figuring interest, etc. 

The Marchant Calculator, made by Marchant Calculating 
Machine Co., Oakland, Cal., is shown in Fig. 15. Instead of 



the usual adding-machine keyboard it has a series of movable 
disks with the figures 1 to 9 on their rims. The operations are 
thus described in the instruction book. 

Addition. 245+3275+84=3604. 

Space carriage to unit column. Place 245 on machine and turn 
handle forward one stroke; clear levers, set up 3275 and repeat 
operation until all the numbers have been added into machine 
when total amount will be accumulated in the right hand dials. 

Subtraction. 24567 - 13245 = 1 1322. 

Space carriage to units column, set 24567 on levers and turn 
handle forward one stroke as in Edition; clear levers and set up 



Fig. 15. — ^Thb Makchant Calculating Machine. 

13245, the number to be subtracted, and give a backward or 
reverse turn to the handle, answer appearing in right hand 
dials. 

MuUiplication. 245 X5281 = 1293845. 

Place 5281 on setting up levers — shift carriage to third column 
(because the multiplier has three figures), and turn handle for- 
ward two times — shift carriage to second colunm and turn 
handle forward four times — shift to first column and turn handle 
five times, completing the operation. In order to check the opera- 
tion see that you have the proper figures set on the levers and the 
proper numbers appearing in the proof dials. 

Division. There are two systems of division used on the 
Marchant. Division by Addition, and Division by Subtraction. 

Division by Addition is the fastest method known, and although 
more difficult to learn, is preferable to the Subtraction method. 

To illustrate the two methods in as simple a manner as possi- 
ble we will divide 25 into 100. 

Addition Method. Set the divisor 25 on levers, space carriage 
to units column, and turn handle of machine forward as in addi- 
tion, watching the Product dials for 100, the dividend, to appear. 
In four forward turns you have 100 and the quotient 4 is shown 
in the left-hand dials. 

Subtraction Method. Set the Dividend 100 on levers and add 
it into machine by one forward turn of handle, clear the left- 
hand dial of the Fig. 1. Clear the levers and set up Divisor 25, 
then reverse the handle action. In four backward turns the 
Dividend 100 has been taken from the lower dials and the quo- 
tient 4 appears in left-hand dials. 



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CHAPTER XV 
OLD-SCHOOL COST ACCOUNTING. IRONWORKS BOOKKEEPING 



BOOK-KEEPING AT AN IRON BLAST FURNACE IN 
PENNSYLVANIA 

In the year 1872 the author was engaged as bookkeeper at a 
blast furnace in Northern New Jersey. He was first sent to 
two furnaces at a works near Easton, Pa., for three weeks to 
study the system of bookkeeping then in general use in the 
principal furnaces of the Lehigh Valley, so that he could open 
and keep a set of books on the same system at the New Jersey 
furnace. The system used at the Pennsylvania works was 
old-fashioned double entry with Cash Book, Journal and 
Ledger, and such auxiliary books as are needed at a blast 
furnace, such as Furnace Book, in which were entered daily 
the weights of the coal, ore and limestone used by the fur- 
nace and the product of pig iron with its several grades, 
Coal and Ore Book, Shipping Book, Labor Book, etc. There 
were also Time Books for each department, such as Furnace, 
Foundry, Mine, Farm, Blacksmith Shop, Wheelwright Shop, 
and Outside Labor. In the latter book the kind of work 
that each man was engaged upon was marked by a symbol 
so that at the end of the month the total outside labor could 
be distributed to the several accounts to which it should be 
charged. There was a Company Store in which the men 
traded, and it kept a Store Ledger with an account for each 
man. At the end of each month the store sent to the office 
of the furnace the charges against each man, which were 
entered on the Labor Book together with charges for Rent, 
Doctor, Cash Advanced, etc., and the balances due the men 
were paid a few days after the end of the month. In the 
Labor Book the men's names were grouped by departments, 
and it was ruled with columns for credits for Labor, charges 
for Store, Rent, Doctor, etc., and Balance. 

Journal entries were made from the Labor Book, charging 
Furnace, Foundry, Mine, etc., and crediting Labor, and 
charging Labor and crediting Store, Rent, Doctor, etc. 

Invoices for goods purchased were marked with the accounts 
to which they should be charged, such as Store, Furnace, 
Mine, etc., and Journal entries were made from them, Store 
Dr. to Sundries, General Supplies Dr. to Sundries, etc., 
the Simdries being the names of the creditors from whom the 
goods were purchased. A Ledger account was kept with 
each creditor in the old-fashioned way, which involved a 
great deal of labor for the bookkeeper and often caused con- 
siderable delay in getting a monthly trial balance. When the 
monthly statements from creditors came in they were checked 
against the ledger entries, and the original bills and statements 
were then sent to the New York office to be paid, and a long 
journal entry was made, Sundries (names of creditors) Dr. to 
Company, which when posted balanced the creditors' accounts. 

Each department^ Furnace, Mine, etc., was charged directly, 



as above stated, with the labor and with the goods purchased 
belonging to it, as far as possible, and also with such supplies. 
General Charges (outside labor) or service of t-eams, and with 
goods delivered to it from the Store, Farm, Blacksmith Shop 
or other department, as it might have received during the 
month. The original entries for these transfer accounts were 
either Day Book entries or invoices or memorandmns from the 
several departments. 

Each department also was credited with the products it had 
shipped or delivered to other departments, at cost price as 
nearly as it could be estimated, thus Ore was charged and the 
several mine accounts credited with all the iron ore produced 
by the mines, the price per ton being the total charges against 
the mines during the month divided by the number of tons 
produced. The several depart ments, Blacksmith Shop, W heel- 
wright Shop, Furnace, Dmestone Quarry, and Saddler Shop, 
not only had operating accounts with these nan:€s, kut also 
separate Supply Accounts and Tools and Fixtures Accounts. 

After all of the various debits and credits to all these 
accounts had been entered in the journal and posted in the 
ledger, an entry was made Pig Iron Dr. to Sundries, crediting 
Coal, Ore and Limestone Accounts for the ncaterials used, and 
the several operating accounts above nanred with the labor 
and supplies furnished by the departncents, charging or 
crediting Pig Iron also with any balance representing profits 
or losses in these accounts. Thus, the total cost of pig iron 
in any month was the sum total of aU the charges that had 
been made to Pig Iron account for the month less any credits 
that had been made for slight profits in the operating accoimts. 
At the end of the year, when a general inventory' was taken, 
apparent profits and losses in operating accounts were cred- 
ited or charged to Pig Iron account for December. At the 
end of 1872, at this Pennsylvania furnace Farm account was 
credited and Lime account charged with a profit of S791.84 of 
Lime account, and Pig Iron then charged and Farm account 
credited with $1127.27 loss on Farm, and Pig Iron charged . 
and Store credited with $4163.93 loss on Store, which indi- 
cated that in that year, at least, the workmen had not been 
overcharged with the store goods and farm products they 
had purchased. 

When pig iron was shipped on orders from the company 
it was charged on the furnace books at a round figure slightly 
in excess of the average cost per ton of the pig iron remaining 
on hand as it appeared on the books, thus, in June, 1872, the 
cost of pig iron on the books was $21.40 per ton and the iron 
shipped during that month was charged to the company at 
$22.00. In July, 1873, the apparent cost was $34.39 per ton, 
and the shipments were charged at $35.00. 

It will be noted that this method of obtaining the cost of 



140 



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OLD-SCHOOL COST ACCOUNTING. IRON WORKS BOOKKEEPING 



141 



pig iron, while quite satisfactory from a bookkeeper's stand- 
point, since it enables the books to be balanced each month, 
and makes the total cost of pig iron in any month the total 
cost of running the establishment in that month, is far from 
g;i\ing the true cost, for it takes no account of interest on the 
investment, depreciation from wear and tear or from ob- 
solescence of the plant, nor of the cost of relining the furnace, 
which had to be done about every two years. In fact, the 
two furnaces at this plant were already obsolete and had to 
be torn down and replaced by a large furnace in a few years. 
In 1872 the average price of No. 1 Foundry pig iron, at 
Philadelphia, was $48 per tor, having risen from $33 in two 
years. In 1873 the average price had dropped to $43, and 
it continued dropping until 1878, when the average price was 
only $17.50. In these five years three-quarters of all the 
furnaces in the United States became obsolete and had to be 
rebuilt or abandoned. 

Following is a list of the ledger accounts kept at the iron 
works in Pennsylvania, together with brief samples from some 
of the other books, from notes which the author has kept 
since his two visits to the works in 1872 and 1873: 

Ledger Accounts at a Pennsylvania Blast Furnace 



Farm (includes Horses and 


Pig Iron. 


Teams). 


Rent. 


General Repairs. 


Saddler Shop Tools and Fix- 


General Charges Tools and 


tures. 


Fixtures. 


Saddler Shop Supply. 


General Charges. 


Saddler Shop. 


Labor. 


Savings Fund. 


Limestone Quarry Supply. 


Store. 


Limestone Quarry. 


Wheelwright Shop Tools and 


Limestone. 


Fixtures. 


Moulding Shop. 


Wheelwright Shop Supply. 


Office. 


Wheelwright Shop. 


Ore. 


Wood. 


Total representative accts. 


46 


Personal accts. 


51 



Total 



97 



Sample of Cash Book 



Blacksmith Shop Tools and 

Fixtures. 
Blacksmith Shop Supply. 
Blacksmith Shop. 
Back-vein Ore (and ten other 

Ore Accts.) 
Company (New York Office). 
Cash. 
Coal. 



Coal WTiarf . 

Engine Room Tools and Fix- 
tures. 

Engine-room Supply. 

Engine Room. 

Furnace Tools and Fix- 
tures. 

Furnace Supply. 

Furnaces. 











Credits 


1872 


Cash 










Dr. 


Ledger 


Labor 
Book 


June 1 


On hand, balance from laat mo. 


757 


15 










3 


H. Frankenfold, for hay 
Blacksmith Shop, work done 




50 


57 


00 






4 


Lime Acct. Lime sold in May 
Gen. Ch. T. ft Fix. Horse of 

R. F. Stover 
Joe Lewengood. Acct. Labor 
Office Acct. Washing Towels 
Savings Fund. Wm. Martin de- 
posited 


191 
100 


54 

00 


190 


00 
50 


' 


00 



FURNACE B00£ 
Seventy-fourth Weekly Report for Furnace No. 1, Blast No. IL 



Week Ending Aug. 30, 1872 





















Proportions op 






Date 


Charges 


Coal 


Ore 


Limestone 


ToUl 


Total 




Total 


OsKfi Used 






August 


each 
Day 


per 
Charge 


per 
Charge 


per 
Charge 


Coal 


Ore 




Limestone 




Remarks 






































I 


S 


J 


B 


O 


R 






S 24 


29 


24 




lOH 


6% 


609 




304* 


H 


H 


H 


H 


H 


H 






M 25 


27 


24 




lOH 


648 


567 




283« 


H 


H 


H 


H 


Vb 


H 






T 26 


27 


24 




10H 


648 


567 




283» 


H 


H 


H 


H 


H 


H 






W 27 


28 


24 




10H 


672 


588 




294 


H 


H 


H 


H 


H 


H 




T 28 


26 


24 




lOH 


624 


546 




273 


H 


H 


H 


H 


H 


H 






F 29 


22 


24 




lOH 


f 528 
I 221 


462 




231 


H 


H 


H 


H 


H 


H 


Stopped 4 hrs. repairing 


arch. 


S 30 


25 


24 




I0J4 


600 


525 




262« 


^ 


Vs 


H 


H 


H 


H 






Average Coal 2-10-3-23 


4637 


3864 


1932 


Average Ore 2-2-1-21 




Quantity of Iron Made 








Tons 


Cwts. 


Qrs. 


Lbs. 




1 


2A 


2B 


3 


4 




2B 


3 




4 






\ 


2A 


Ore on hand 


10.053 


16 


3 





























received 
used 


904 
193 


7 
4 


1 







S 24 








6 










7 






M 25 








6H 














8«» 


balance 


10,765 











T 26 
W 27 










6H" 








7 

7H 






















5H 












Coal on hand 


5.049 


11 








T J2A 








6^ 










6 






received 


1,022 


14 








F 29 








4 














jm 


used 


231 


17 








8 30 










7» 








4 




2H 


balance 


6.640 


8 
















28 H 


\'^y 


2 






31^ 


I7H 


Limsstone used 


96 


12 








Average Limestone. 1 -1-0-26. Total Iron, 60 No. 3, 31 Mott-91 


tons. 


1 



























Digitized by 



Googk 



142 



BOOKKEEPING AND COST ACCOUNTING 



The weights of coal, ore and limestone charged into the 
furnace were given in hundredweights (112 pounds) and the 
averages per gross ton of iron made were recorded in the old 
style in tons, cwts., quarters and pounds. It is interesting 
ing to note that the total product for the week was only 91 
tons. No. 2 furnace, working on better ores, made in the 
same week 108 tons, with a coal consumption of 1-18-0-4; 
ore, 1-15-0-14; and limestone, 0-16-3-16. These were 
about the average figures for a small blast furnace using 
anthracite coal at that time. Ten years later the small 
furnaces were replaced by a large one, coke was used instead 
of anthracite for fuel, fire-brick ovens were substituted for 
cast-iron hot-blast stoves, the production mounted to over 
100 tons per day, and the fuel consumption was reduced 
to less than a ton of coke per ton of iron made. Comparing 
the figures in the above table with the following report of the 
same furnace in 1857 it apj)ears that no unprovement in 
practice had been made in the 17 years prior to 1873. 

Note from an old Report Book of the same Furnace: 

Report of a Larger Pennsylvania Furnace 

Week ending Nov. 24, 1871 



Furnace No. 1, Blast No. 5, 84 weeks ended April 4, 
1857. 



Average Coal per ton of Iron 
Average Ore per ton of Iron 
Average Limestone per ton of Iron 
Average Iron made per week 



Tons 



I 

2 



96 



Cwts. 



18 
2 

16 
3 



Qrs. 



Lbs. 



23 

26 

O 

10 



Furnace No. 2, Blast No. 4, Blowed out Feb. 27, 1856 
Blowed in Aug. 4, 1856: 
Ran 83 weeks, blast ended Mar. 12, 1858. 
Iron made first six weeks, 93, 84, 124, 109, 111, 116 tons. 



Average Iron per week for 83 weekfl 
Average Coal per ton of iron 
Average Ore per ton of iron 
Average Limestone per ton of iron 



Tons 


Cwts. 


Qrs. 


112 


9 


1 


1 


16 





2 


1 


1 





15 






Lb5. 



16 

12 

24 

9 



Material Consumee 


> 








Product op Furnace 




Coal 


Ore 


Limestone 


No. Ix 


No. 2x 


No. 2 


No. 3 


White 


Aggregate 


289 


426 « 


289 


30 


5IM 


25 


7 


I4H 

5H 


200Hton 


Stock on Hand at Last Report 


U2H 


Iron Shipped 


Iz 


2z 


2 


3 


w 




10 


120 








Glen I Wks. 
W. F. ft M. Co. 
Barber ft Co. 

Total Shipped 




10 


50 
70 






130 


Stock on Hand 












30 


53 


72 H 


7H 


20 


183 



Heading of a Monthly Pay List at 
a Charcoal Furnace in New Jersey 
in 1871 

We, the subscribers, do hereby ac- 
knowledge to have received the sums 
prefixed to our names respectively, in 
full payment of the amount due us for 
work done between the dates specified, 
and we, the subscribers, as witnesses, do 
hereby certify that we have witnessed 
said payments where the receivers could 
not sign their own names. 

Heading of Ck)lumns: Napie. Em- 
ployment. Commencement and £xpira> 
tion of time of Service. Time Employed, 
Work Done. Rate. Total Amount Paid. 
Paid in Goods. Debit Balances. Credit 
Balances. Paid in Cash. Signatures 
of Payees. Witnesses. Remarks. 



LABOR BOOK 
Summary of Pay Roll, June, 1872 



Debits 





Bal. from 
Laat Month 


Store 


Rent 


Coal 


Wood 


Farm 


Doctor 


General 
Charges 


Totia 


Furnace: 




















Total 


20.94 


375.91 


68.00 


3.00 


10.14 


12.15 


21.00 


1.50 


512.64 


Oeneral Charge*: 
(33 names) 




















Total 




240.93 


44.50 


2.77 


6.89 


3.00 


13.00 


57.93 


369.02 



Credits 


Balances 


Cash 


Balance to 


Next Month 


Time 


Rate 


Amount 


Bal. last Mo. 


Total 


Debit 


Credit 


On Pay Day 


Debit 


Credit 


(33 items) 




















Total 




2015.98 


10 31 


2026.29 


1.38 


1515.03 









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OLD^CHOOL COST ACCOUNTING. IRON WORKS BOOKKEEPING 



143 



BOOKKEEPING AT A NEW JERSEY BLAST FURNACE 

When the author opened the books at the New Jersey 
furnace he followed the general system that he had found in 
Pennsylvania, but made several changes in order to decrease 
the number of accounts kept in the Ledger. For example, 
instead of having separate accounts for Blacksmith Shop 
Supply. Blacksmith Shop Tools and Fixtures, and Black- 
smith Shop (operating account), there was only one Black- 
smith Shopr account, the Dr. Balance of which at the begin- 
ning of the year represented the inventory of its equipment, 
and a General Supply account, which included the supplies 
(other than furnace raw material) for the furnace and for all 
the auxiliary departments. Later all the personal accounts 
of parties from whom goods were purchased and whose bills 
were credited to New York office for payment, were taken out 
of the ledger and one general account, Accounts Payable, 
substituted for them, the bills being listed in an Invoice 
Register, which was provided with columns headed with the 
names of the accounts to which the goods purchased were to 
be charged. There were several ore mines owned by the 
Company about four miles from the furnace, and a mines 
store, in which all local accounts relating to the miners were 
kept, but the furnace books were a sort of clearing house 
between the mines and the New York office. All the bills for 
goods purchased, certified by the mines manager, were sent 
to the furnace for record, and in the furnace books were 
charged to Mines account and credited to Company, while 
Company was charged with the ore shipped to outside parties 
at the arbitrary price of $5.00 per ton. The mines had been 
run, more or less profitably, for over a hundred years, and no 
cost accounts had ever been kept at them. The system of 
charging New York office with the pig iron shipped at the 
book cost for the month in which it was made, thus showing 
neither profit nor loss on the furnace books, was not adopted 
for the ore shipped, as the books kept at the mines store 
gave no means of estimating the cost at the several min^, 
but at the arbitrary price of $5.00 per ton (which at that 
date was below the market price for good grades of New Jersey 
ores). The mines account showed a profit of over $50,000 
in the year 1873, thus overbalancing all the losses at the fur- 
nace, including the cost of new construction, as will be shown 
below. 

The method of bookkeeping used at the furnace is shown 
by the following journal entries and the notes explaining 
them.* 

The "Siunmaries for Posting" at the top of the second 
column on the next page were not used in the actual book- 
keeping, but they are given here in order to diminish the 
number of entries in the coliunns Personal Accounts and 
Horses and Teams in the Ledger on page 147. By means of 
these sunmiaries sixteen ledger postings have been reduced 
to foiur. They have not been used in the Column Ledger on 
page 148. 

* The furnace has been abandoned for many years, but the mines 
and stores are still operating. In 1916 the author found at the fur- 
nace store the old books that he kept 43 years before, and copied 
from the Journal the entries here given. 



Journal Entries 



March 31, 1873 



No. 

1 P. R. G. (Manager) 


3000 


00 






To Company, for Cash brought from New - 










York 






3000 


00 


. 2 Cash To Sundries 


14% 


69 






To Store 






60 


00 


To Coal 






18 


69 


To Wood 






14 


00 


To P.R.G. (Manager) Cash for Pay Roll 






1400 


00 


To Horses and Teams (for use of team) 






4 


00 


3 Sundries To Cash 






1496 


10 


Labor 


838 


67 






Other accounts, mostly personal 


657 


43 






4 Sundries To Labor 






2381 


68 


Blacksmith Shop 


99 


63 






Wheelwright Shop 


44 


50 






Horses and Teams 


263 


70 






Office 


233 


34 






General Charges* 


337 


00 






General Repairs 


16 


50 






New Construction 


138 


63 






Furnace 


1228 


38 






5 Sundries To General Charges 






333 


80 


Wood (cutting wood) 


75 


20 






Horses and Teams 


8 


60 






Furnace 


23 


20 






General Supplies (getting timber for W. W. 










Shop) 


47 


80 






Coal (unloading) 


44 


80 






Ore (unloading) 


3 


20 






Limestone (unloading) 


6 


40 






New Construction 


84 


40 






Mines (hauling coal) 


40 


20 






6 Labor To Sundries 


1441 


95 






(Charges against workmen on pay roU) 










To Store 






1322 


55 


To Coal 






9 


56 


To Wood 






64 


50 


To Horses and Teams 






42 


14 


To General Charges 






3 


20 


7 Sundries To Horses and Teams 






326 


00 


(Charges for hauling done) 










General SuppUes (timber for W.W. Shop) 


51 


50 






Furnace (timber for repairing houses) 


135 


75 






New Construction 


12 


75 






Mines 


59 


50 






Wood 


66 


50 






8 Sundries To Store 






III 


30 


(For supplies furnished) 










Furnace 


16 


60 






Horses and Teams 


16 


41 






Personal accounts (transferred from store 










to office) 


78 


29 






9 Coal To Sundries 


493 


51 






To Horses and Teams (hauling) 






219 


67 


To Mines (hauling by mine teams) 






98 


09 


To Personal accounts (outside teamsters) 






175 


75 


10 Limestone To Sundries 


55 


60 






To Horses and Teams (hauling) 






31 


41 


To Mines 






22 


22 


To Personal accounts 






1 


97 



• General Charges covers outside labor, not charged directly to the other 
accounts on the pay roll, but distributed to them in the next entry according 
to notes made in the time book of the outside labor loss. 



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144 



BOOKKEEPING AND COST ACCOUNTING 



Journal Entries — Continued 



No. 

1 1 Pig Iron To SuDdries 

Hauling 132 tons to R.R. 
To Horaea and Teams 
To Mines 
To Personal accounts 

1 2 Horses and Teams 

To Personal Accts. (G. White, H day) 

13 Personal Accounts 

To Horses and Teams 



1 4 Sundries 
Mines 
Personal Accounts 



To Blacksmith Shop 



1 5 Personal Accounts 

To Wheelwright Shop 



16 Store 

To Wood 

To Horses ani Teams 



To Sundries 



17 Mines 

To Coal (furnace coaT sent to mines) 



18 Sundries 
Furnace 

Blacksmith Shop 
New Construction 



To General Supplies 



19 Sundries To Personal Accounts 

As per Invoice Register 
Mines 
Store 

General Supplies 
Coal 

Limestone 
General Repairs 
New Construction 

20 Ore. Spaniahorebonght for furnace mixture 

To Company 

21 Sundries To Mines 
Company (for ore shipped on Company's 

account) 
Ore (hauled to furnace) 
Store (goods shipped to Furnace Store 

by Mines Store, Cr. Mines account) 
Coal (unloading by men on Mines Payroll) 
General Supplies (received from mines) 

22 Mines 

To P. R. G. (Manager) Cash for Mines 
Pay RoU 

23 Company 

To Pig Iron Shipped in March: 

10 Tons at 139.42 (Feb. Cost) 1394.20 

Hauling to Station 7.50 

24 Personal Accounts 

To Company (Invoices certified to Com- 
pany for payment) 

25 Pig Iron To Sundries 
316 tons made in March A v. Cost $34. 18 

To Coal 

To Ore 

To Limestone 

To Wood 

To OflSce (includes Supt's salary) 

To Blacksmith Shop 

To Wheelwright Shop 

To General Repairs 

To Furnace (Labor 25l.58,Sund8.416.28) 



99 



14 



253 



285 
5 
2 



6.827 
311 
806 

4.501 

124 

877 

28 

1.061 



8.050 
156 

936 
29 
15 

1.703 



1,401 



14.092 



10,799 



00 



88 



82 



50 



90 



00 



58 



70 



72 



23 



80 

5 
13 



253 
292 

13.475 



1,061 
9.187 



1,703 



1,401 



14.092 



3.605 


11 


3,787 


84 


479 


04 


24 


00 


236 


34 


76 


88 


14 


00 


908 


16 


1,667 


86 



44 
25 
31 



88 

82 
75 

50 



50 
40 



00 
55 

97 



95 
28 



58 



70 



72 



Summaries fob Posting 
Entries 8 to 15 
Horses and Teams 



Nos. 


Dr. 


Cr. 


8.6 


16 


41 


42 


14 


12.7 





88 


326 

219 


00 


9 


17 


29 


67 


10 






31 


41 


11 






80 


44 


13 






14 


82 




714 


48 



Personal Accounts 



Nos. 


Dr. 


Cr. 


8. 9 


78 


29 


175 


75 


13. 10 


14 


82 


1 


97 


14. II 


1 


25 


13 


31 


15, 12 


1 


50 




88 




95 


86 


191 


91 



The posting of the above 25 journal entries required entries 
on only 21 pages of the ledger containing representative 
(asset or operating) accounts, as compared with 46 pages 
containing such accounts in the books at the Pennsylvania 
works. In both places the personal accounts might have 
been contained in two pages, Accounts Receivable €uid 
Accounts Payable, if desired. 

All of the posting might have been done on a sin^e page of a 
Works Ledger, such as is shown on page 147. The page is a 
large sheet containing a colunm for each account. It is 
strictly double entry, the debit items being entered in black 
ink and the credit items in red. The balances shown are those 
of the single month posted, and do not include balances 
brought forward. These might be entered below the monthly 
balances in the following manner: 





Company 


P.R.G. 


Cash 


Store 


Office 


Debits 
Credits 


9,451 

18,16t 


70 

67 


3000 

3103 


00 

68 


14% 

1496 


69 

10 


1251 
1493 


44 
86 


233 

g36 


34 

34 


Balance. Month 
Balance from last Mo. 


8J00 

s4Me 


97 
10 


103 
260 


68 
72 


24 


59 
60 


B41 
1760 


1 

09 


S 
3 


00 
00 


Balance Forward 


S3,017 


07 


157 


14 


25 


19 


1519 





00 



A still better plan is the use of the Combined Journal- 
Ledger, which dispenses with both the journal and the old- 
style ledger. All the journal entries have been posted into 
the single form shown on page 148. It will be noticed that it 
contains fewer figures than the form on page 147, it avoids the 
red-ink entries, and there is less trouble in making the addi- 
tions. All the entries can be made in it directly from the 
footings of the auxiliary books of original entry, except a 
few that may require explanations, and they can be taken 



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OLD-SCHOOL COST ACCOUNTING. IRON WORKS BOOKKEEPING 



145 



from a Blotter or Day Book, kept in journal form, for the 
record of those special transactions that are not included in 
the regular monthly or routine entries in the other books. 

Four additional lines should be added to this Journal- 
Ledger, giving the Dr. and Cr. Balances brought forward 
from the preceding month and the new balances carried 
forward to the next month. 

A carbon, or a photostat, copy of this Journal-Ledger may 
be used for a monthly statement to be sent to the Company's 
office. It forms both a trial balance and a record of the 
business for the month. 

The use of the condensed form of monthly ledger shown on 
page 148 would make unnecessar>' many of the longer journal 
entries. For example, No. 4, " Sundries to Labor " consists 
of the footings of the columns of the Labor Book, and these 
could be posted directly into the ledger without going into 
the Journal. Entry No. 5 comes from a summary of small 
entries in a Day Book called General Charges, and as this 
summary is entered in this book in permanent form at the 
end of the month, it might be posted directly into the ledger. 
Entry No. 19 is but a transcription of the footings of the 
columns of the Invoice Register, and there is no need of put- 
ting it in the journal. 

The entry " Pig Iron to Sundries " for the preceding month 
is something of a curiosity. Here it is except as to the details 
of the charges for different kinds of ore which ranged from 
$3.40 to $9.63 per ton. 

Feb. 28, 1873. 



Tig Iron To Sundries 


I 








For Cost of making Pig Iron in February in- 










cluding filling of furnace and all expenses 










since Jan. 27, 56H tons at $139.42 


8190 


63 






To Coal 






3886 


97 


Ore 






2618 


37 


Limestone 






322 


07 


Furnaoe 






1557 


14 


Office 






242 


49 


Wood 






90 


00 


General Repairs 






53 


59 



The corresponding entry for March was for 316 tons at 34.16 $10,799.23 
The corresponding entry for April was for 24 1 ^ tons at 36.87 8.902.86 

Total for 3 months 616 K tons at $45.26 $27,892.72 

The average price of No. 1 Foundry Pig Iron, at Phila- 
delphia, that year was about $43. The Furnace went 
out of blast at the end of April and it made no more iron 
for nine years, or until the " boom " year 1882. 

In Journal entry No. 23 there is a charge to the Com- 
pany for 10 tons of iron shipped at $139.42 per ton, plus a 
charge of $7.50 for hauling the iron to the railroad and load- 
ing it on a car. In April, 30 tons more was shipped and 
charged at the same price per ton. In May the charge was 
as follows: 



I8H tons (Feb.) at $139.42 
91 H tons (Mar.) at 34.18 
Hauling 



$2613 


83 




3127 


47 




86 


69 


5827 







This is a very satisfactory system of bookkeeping for the 
furnace, for no matter how high the cost of making pig iron 
it all gets charged to the Company when the iron is shipped, 
so that the books are balanced without the trouble of com- 
puting and entering profits or losses. 

On the Company's books at the New York office, however, 
there would be a different story. Pig Iron account would be 
charged and the New Jersey furnace would be credited with 
each shipment of iron at the apparent cost of the iron on the 
furnace books in the month in which it was made, plus the 
cost of hauling to the railroad and loading on cars. Pig 
Iron would be credited with the amount received from the 
sale of each lot shipped. 

Assuming that all the iron made at the New Jersey furnace 
had been shipped before June 30, and that a single entry was 
made for it at that date before closing the books, and that 
at the same time an entry was made charging all the iron 
made at the two furnaces in Pennsylvania during the six 
months, whether it was shipped or ordered stored for Com- 
pany's account, at the book cost at these furnaces, the Dr. 
side of Pig Iron account would appear as follows (omitting 
the charges for hauling) : 

Pio Ibon 



To Penna. Furnaces 














1873 


Jan. 


745 H tons at 


30 


06 


22.529 


97 








Feb. 


705 


27 


77 


19,577 


85 








Mar. 


841 J4 


27 


97 


23,536 


75 








Apr. 


861 


28 


20 


24,280 


20 








May 


903H 


35 


31 


31,902 


•58 








June 


822 


37 
>0 


28 
18 


30,662 


80 


152,490 


15 




4879 av. 








1 
To N. J. Furnace 
















Feb. 


58Hton8at 


139 


42 


8.190 


63 








Mar. 


316 


34 


18 


10.799 


23 








Apr. 


241 H 


36 


87 


8.902 


86 


27,892 


72 




616M 


45 


26 






180,382 


87 



99 



(The figures for tons and cost per ton were taken from the 
furnace books.) 

What would appear on the credit side of the account would 
depend upon the dates at which the iron was sold. If the 
whole 5495i tons had been sold at the average price of No. 1 
Foundry at Philadelphia, in 1873, $43, it would have brought 
$236,295.75, an apparent profit of $55,912.88, less the cost 
of selling, bad debts, ete. (there were many bankrupteies in 
1873). But if it had been stored for a year or more (as was 
done by many furnaces in the Lehigh Valley in 1873-4), and 
sold at the average price of 1874, $30, it would have brought 
only $164,857.50, showing a loss of $15,525.37, besides cost 
of storage and loss of interest. 

The apparent cost of 6161 tons of pig iron at the New Jersey 
furnace, $45.26 per ton, was far below the actual cost (on 
the basis of charging all the expenses of the plant to pig iron), 
for the following items appear on the books charged respec- 
tively to New Construction No. 1 Furnace and Repairs of 
No. 1 Furnace, that were later charged to Company. 



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146 



BOOKKEEPING AND COST ACCOUNTING 



Expenditure on No. 1 Furnace from Sept 1/72 to Jan. 27/73 






(Converting a charcoal furnace into an anthracite furnace) 


18.137 


26 


Coet of repairing No. 1 Furnace, including all expenses at 






Furnace from Apr. 27, 1873, to Dec. 31. 1874 


7.436 


51 


There were also entries for the cost of building No. 2 Furnace 






and its appurtenances Mar. 31, 1873, to Nov. 30, 1874. 






totaUng 


32.618 


82 


Total 


58,192 


69 



All of which was a dead loss. The work of building No. 2 
furnace was abandoned when the furnace was half finished in 
1874, and No. 1 furnace after being repaired was not put in 
blast until 1882, when, after another disastrous campaign, 
it was finally abandoned. 

The system of bookkeeping used at the Penhsylvania fur- 
nace was a fine example of double-entry carried to an extreme. 
Everything was journalized and posted and balanced monthly, 
and monthly costs of operation were obtained for the two 
furnaces (taken together, no attempt being made to get 
separate costs) for the blacksmith shop, wheelwright shop, 
moulding shop, and for each separate mine, but the costs 
obtained were merely accountants' costs; they gave no in- 
formation to the management as to the causes of variations 
in costs nor anything as to how the costs of any item might 
be reduced. The " costs were tied to the general books " 
to the limit; " the costs were proved by the books," but 
they were of no practical value. 

The chief thing lacking in the system is a statistical state- 
ment of comparative monthly costs, which might be made on a 
single sheet lasting a year. The following is such a statement 
for the three months' campaign of the New Jersey furnace: 

Cost of Piq Iron 1873 



Pig Iron Made — tons 

Coal per ton of iron, tons 
Ore per ton of iron, tons 
Limestone per ton of iron, tons 

Book Coet per ton of iron: 
Coal 

Ore 

Limestone 

Labor, including Office 
Supplies and Sundries 
Repairs 

Total 
Cost of Raw Material, per ton: 
Coal 
Ore 
Limestone 

Total Book Cost per month 
Normal Costt 

Furnace Operating Loss 
Furnace Operating Loss, per ton 



Feb.* 



58«,i 



9.22 
7.19 
1.82 



55.94 

44.97 

5.50 

20.22 

4.13 

8.72 



139.42 

6.07 
6.24 
3.01 



8190.63 
1938.75 



6251.88 
106.42 



Mar. 



316 



2.02 
2.27 
0.50 



11.41 
11.99 
1.52 
4.71 
0.68 
3.87 



34.18 

5.65 
5.28 
3.01 



10.799.23 
10.428.00 



371.23 
1.18 



Apr. 



24 M 



1.97 
2.33 
0.65 



12.16 
13.93 
1.94 
6.20 
0.66 
1.98 



36.87 

5.33 
5.97 
2.66 



8902.86 
7769.50 



1133.36 
3.87 



* Remarks. The February costs included filling the furnace and all costs 
of the plant from Jan. 27. Furnace lighted 10 a.m. Jan. 30; Blast put on 
4.30 P.M. First cinder Jan. 3 1 , 6 p.m. The furnace worked very badly from 



The above statement illustrates the fallacy of '' charging 
to the product all the factory costs of the month," which is 
advocated by many accountants, and letting the cost remain 
on the books as an inventory value, crediting this value to 
Pig Iron account and billing the iron to the Company at 
the same value when it is shipped. As was shown above the 
shipments in April were billed part at $139.42, the February 
book cost, and partly at $34.18, the March cost. If any of the 
April iron had been shipped in April it would have been billed 
at $36.87. 

A far better method of treating the pig iron account is 
after charging it as above with all the operating costs for the 
month, to credit it and charge Profit and Loss with the dif- 
ference between the operating cost and the " normal cost," 
which is the estimated cost with the prevailing prices of 
materials and fairly good furnace practice for a furnace of 
that size. The iron will be inventoried at this normal cost 
until it is shipped, and when it is shipped wiU be billed to the 
Company at the same cost. 

Another bookkeeping device for figuring costs at a 
blast furnace is to charge furnace operating account with 
the monthly cost for materials, labor, supplies and regular 
repairs, together with a fixed sum, say 50 cents per ton 
of iron made, which is credited to Reserve for Extraor- 
dinary Repairs, which is allowed to accumulate until the 
furnace is blown out, when 'it is drawn upon to pay for 
the cost of relining and other repairs. At the end of 
the month Pig Iron is charged and Furnace Operating 
credited with the pig iron made^at the estimated normal 
or inventory price. The balance of the operating account 
will represent a profit or loss which can either be trans- 
ferred to Company at the end of the month or carried 
to Profit and Loss account on the furnace books until the 
end of the fiscal period, when the latter account is closed 
into the Company account. 

An itemized statistical statement, like the one shown 
above, is one of the most important parts of blast-furnace 
cost accounting, for it gives the information that the owners 
or directors most need. The items imder Book Cost should 
include the total expenditure in dollars as well as the cost 
per ton, and they should include also Reserve for Extraordi- 
nary Repairs and Depreciation, Administration Expenses 
(relating to the furnace and not to the selling depart- 
ment) and Interest on Investment. The statistics also 
should be charted, as shown on page 106, entries being made 
monthly. 

the beginning. Stopped filling April 27, 2 p.m. Stopped blast I p.m., 28th. 
Length of blast 1 3 weeks. 

Weekly product: 23. 16^. I, 21 H, 56 Ji. 72 H. 86, 77H. 54 M. 58 H. 77H. 
64^, 6M. Total 614^ tons. Grades 463H No. 3, 83^ mottled. 19H 
white, 49 H silver gray. 

t Normal or Inventory cost, based on average costs (at that date) of 
material and average good practice. 



2 tons Coal at $5.75 


$11.50 


2.2 tons Ore at 5.50 


12.10 


0.8 tons Limestone at 3.00 


2.40 


Labor 


4.50 


Supplies, Repairs, etc. 


2.50 



$33.00 



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OLD-SCHOOL COST ACCOUNTING. IRON WORKS BOOKKEEPING 

Ibon Wobks Liooib, Mmreh, 1873 



147 



Journal Entry 


Com- 


P.R.G. 


Cash 


Store 


Labor 


Personal 


General 


General 


Office 


Horses 


Black. 


No. 


pany 










Accounts 


Charges 


Repairs 




and 
Teams 


smith 
Shop 


r 


5000 


00 


3000 


00 






































2 






lAOO 


bo 


14% 


69 


60 


00 






















4 


00 






3 










1496 


10 






838 


67 


657 


43 






















4 


















9S81 


68 






337 


00 


16 


50 


233 


34 


283 


70 


99 


63 


5 














ISii 


66 










333 


80 










8 


60 






6 


















1441 


95 






3 


eo 


















S 














HI 


SO 






95 


86 














714 


48 






14. 15 






















191 


91 














17 


29 






16 










1 




4 


90 






















3 


40 


t 


75 


IS 










































5 


00 


19 














311 


10 






13.476 


97 






877 


28 














20 


1,061 


96 










































21 


8.050 


00 










936 


44 






























22 






1703 


58 






































23 


1.401 


70 










































24 


14.090 


7« 


















14.090 


72 






















25 






























908 


16 


B36 


34 






76 


88 
63 
63 


Total DebiU 


9.451 


70 


3000 


00 


1496 


69 


1252 


44 


2280 


62 


14,844 


01 


337 


00 


893 


78 


233 


34 


309 


59 


104 


Total CrediU 


18.152 


67 


3103 


58 


1496 


10 


1493 


85 


2381 


68 


13.667 


88 


337 


00 


908 


16 


236 


34 


721 


88 


79 





Journal Entry 
No. 



2 

4 

5 

6 

7 
8,9 
10 
II 
14, 15. 16 
17 
18 
19 
20 
21 
22 
23 
25 



Total Debits 
Total Credits 



Wheel- 
wright 
Shop 



14 



24 
15 



50 



60 



00 



General 
Supplies 



47 
51 



g9S 
806 



15 



921 
292 



18 



Wood 



14 

75 
64 
66 



»4 



141 
104 



60 



00 



Coal 



18 

44 

9 

493 

£53 

4501 

29 

3606 



5068 
3886 



69 

80 

56 

51 

00 
10 
16 

11 



Ore 



1061 
156 



3787 



1221 
3787 



20 



84 



Limestone 



55 



124 



479 



186 
479 



40 



60 



00 



04 



Furnace 



1228 
23 



135 
16 



285 



1667 



1688 
1667 



05 



Mines 



40 

59 

98 

22 

6 

I 

253 

6827 

9187 
1703 



8884 
9312 



Pig Iron 



99 



1,401 

10,799 



10.898 
1,401 



00 



New 
Con- 
struction 



138 
84 



12 



2 
28 



266 



75 



86 



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BOOKKEEPING AND COST ACCOUNTING 



tS 






•iQ mox 


S8S?t33S?e?;S^tSS^»S C^^ 8S£?^Sg 


:? 5? 




0s 7 


OT trT — ■ — ■ CS 2f lA — — OO o 








::::::;;:::::: : : ::.::! S 1 :S 


: M : M M i : M M : : M M IT^ !^ 


noil ai«i 


g::::;:::::::: :; :::::!g?5i:5? 


1 i : : ; i : i : i i i M i ; : i M i 






Bauijv 


8:;5:::::::::2::£SS «::«: 


3£ 1 S: :| 


S^::g::::;:::^:ft§« S::-^: 


9312 
8884 

4217 


oovnjnj 


::::::::::::::::: : ; ; s8 ; 


S8§ 1 ::i 


M M ; : : M ; : : M M : : : ;i : 


11 1 l"" 


ono^samii 


.:;::::;::::;:;:; : : .5 : 


3813: 


: : : ! M M M i M ; ; ; ; M ;5 ; 


5? |S :■ 


OJO 


::::::.:::::::::: : : :5 : 


3S 1 2: : 


M; MM; ; ; ;i;M M M 11; 


3787 
1221 

2566 


l«oo 


: .S ::^ ::::::::::: : : :8= : 


;^c^ 1 :?; 




3886 
5068 

1182 


pooM 


: :SSS ::::::;::::: : : :8 : 


8K 1 :g 


: :z -5 ::::::::::: : : : :S : 
: : :::::::::::: : : : : 


?f 1 ;- 


saiiddns 

■ I«J9UaQ 


:;::::::: :8 ::::: : ;S : S 


»A CM 1 ■ P* 


; M M M : M^ : : ; : M :§ M" 


gg 1 ;§ 


doqg 
AVAL 


:::: :^ :;:::::::: : ; : :g : 


SS 1 :8 


'~ ;:',:'.'.::;[ I . . . ^ . 


:i:5 ;a 


doqgsa 


::;::«:;;:::::::: : :SS : 


SS :8 


::;;;": i ; i ::: i : i : i i-^^ i 


^3 :iQ 


suivaj, 
puB sasJOH 


: :8§rS : : : : : ;SS ;^ : ;; s S 5 tc 


S?; 1 8J : 


: :*'^5!2: : : : : : [^^ :g : ;^^S;^tl 


ss 


2 
5 


90550 


::::::::;:::::::: :::?;: 


;?;;?; 8 : 


: : M M M M : : M ; M M i^ : 


SS " : 


sjivda^ 
iwauao 


::;:;:::::;:;;::: : ; :£ : 


:£S 1 S : 


M M : ; M M M M : M : : :i ; 


IS - : 


6aSj«q3 
iwauao 


:;;:S:;;:S::SS;gS ?SS:? 


88 : 


: : : :*^ : : : :« : : JJ iQ : ? "^ ^jq? :5 




s^unoaoy 
IBUOsaaj 


:;;e:;:S;S;:5;SjQ;8S::5?;S 


SS 1 : = 


: : : : : : : : : :^ : i^ 


j2 ± 


;« 


joq«T 


: : : : : : 8 S ?; S 3 S :::::; :S : :S 


St2 1 S : 


: M M ;S-SS8:^ : : M M ;l M^ 


« 8 1 o : 


ajo^g 


: :8 ::Pi?i ::::;::::::::: 8 :: : 


S? 1 ^ : 


^ :^ ii^ M i- : M M M ; :- ; M 


12 1 S : 


^mo 


: : :!S5 :::;::::::::::::: 


£S 1 :S; 


M ; :sS ; M M M M M M M ; ; 


ii 1 :° 


OHJ 


: :8 :::::::::::::::: :S : : 


S8 1 S : 


i ^i M ^ M ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ Mi M 


2 § 1 2 •: 


OO 


:§:: iS ::::::::: :^ :.::: ; 


!S g 1 5: : 


3.000 
14.090 

1.061 


2 <> 


1 ; 

« : 


& 


Co 

P.R.G 

Cash 

Store 

Labor 

Personal Accounts .... 
General Charges 

Office 

Horses and Teams. . . . 

B.S. Shop 

W.W. Shop 

General Supplies 

Wood 

Coal 

Ore '.... 

Limestone 

Furnace 

Mines 

Pig Iron 

New Construction 


J 


Q 

a 




6& 

|i 

» PC 



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OLD-SCHOOL COST ACCOUNTING. IRON WORKS BOOKKEEPING 



149 



COST OF IRON WHEN BY-PRODUCTS ARE MADE 

Iron works accounts tend to become complicated when 
valuable by-products are made in addition to the principal 
product. For example, a blast furnace makes slag, some of 
which may be sold as a raw material for making cement. It 
also makes a vast quantity of gas, part of which is used for 
furnishing and heating the blast for the furnace itself, but 
another part may be sold to an Electric Co. to be used in 
gas engines to make electric current. There may be coke 
ovens run in connection with the furnace, making more coke 
than the furnace can use, and the surplus is sold at the mar- 
ket price. The Electric Co. may also purchase some of the 
gas from the coke ovens, and the tar and gas washings may be 
sold to a Chemical Co., at a price to be agreed upon, for the 
manufacture of by-product chemicals. The Iron Co. itself 
may carry on a cement works, a by-product plant, and an 
electric plant, as branches of its business. Under these cir- 
cumstances it becomes a problem how to find the cost of pig 
iron and of the other products. 

Example. A modem blast furnace with coke ovens adjoin- 
ing makes 10,000 tons of pig iron in a month. The coke 
ovens make 20,000 tons of coke in the same month, of which 
half is used by the blast furnace and half is sold. The follow- 
ing are the statistics of cost, the coke being charged to the 
furnace at the market price, S3 per ton: 



Blast Furnacb: 

20.000 tons Ore @ $5 
IO.OOOton8Coke@$3 
$.000 tons Limestone ® $1 
Labor, $1 per ton of Iron 
Supplies, 50ff per ton of Iron 
Current repairs, 30f( per ton of Iron 
Reserve for Ex. repairs 
Interest on Investment 



Average Cost $16.20 per ton. 

Credits: 

Furnace Gas sold 
Slag sold 



Dr. Balance 
Inventory: 10,000 tons Pig Iron 

Apparent profit on Furaaoe 
CoKB Ovknb: 



$100,000 
30.000 
5.000 
10.000 
5,000 
3.000 
5.000 
4,000 

$162,000 



$10,000 
1,000 

11.000 
151.000 
162,000 

11,000 



30.000 tons Coal @ $1.40 
Ubor, 20^ per ton Coal 
Supplies, Repairs, Interest, etc. 


$42,000 
6.000 
6,000 


20,000 tons Coke make average cost per ton $2.70 

CuDiTs: 

10,000 tons Coke to Furnace ® $3 

Gas sold 

Tar and Washings sold 


$54,000 

$30,000 
3,000 
3,000 



Dr. Balance 
Inventory: 10,000 tons Coke ^ $2.70 

Apparent Profit on Coke Ovens 



$36,000 

$18,000 
$27,000 

$9,000 



Several questions arise in connection with this statement. 
1. Should not the credits of S6000 for by-products of the 



coke ovens be deducted from the gross cost of coke, $54,000, 
making the cost of coke per ton $2.40 instead of $2.70, and 
the inventory of coke on hand made $24,000 instead of $27,000? 

2. Should not the blast furnace be charged with coke at 
the net cost price $2.40 per ton, instead of $3, the market 
price, making the cost of pig iron $15.60 per ton instead of 
$16.20? 

3. Should not the pig iron cost be further reduced by cred- 
iting the furnace with $11,000 for by-products, making the 
net cost of pig iron and the inventory value per ton $14.60? 

In the simplest form of accounting no attempt would be 
made to separate the blast furnace from the coke ovens in the 
general ledger and to determine unit costs of product from 
the ledger, but all charges and credits would be made to a 
single Manufacturing or Operating Account as below: 



Dr. 



Operating Account 



Cr. 



Ore, 20.000 tons @ $5 
Coal, 30,000 tons @ $1.40 
Limestone, 5,000 tons ® $1 
Labor 

Supplies, Repairs and Reserves 
Interest 



$100,000 
42.000 

5.000 
16.000 
19.000 

4.000 



$186,000 



Furnace Gas 
Furnace Slag 
Oven Gas 
Oven Tar, etc. 



Balance 



$10,000 
1.000 
3.000 
3.000 



17.000 
169.000 



$186,000 



Inventory 10.000 tons Coke @$ 2.40 $24,000 
10.000 tons Iron ^ $14.50 145,000 



169,000 



Thus showing no profit, all the credits for by-products 
going to reduce the cost and the inventory value of the coke 
and the iron. Or, if the inventory were made at the gross 
costs given in the first table it would appear as follows: 



10.000 tons Coke ®$2.70 
1 0,000 tons Iron @ 1 6 . 20 

Inventory 
Less Balance of Account 




Profit, $1 1.000 on Furnace, $9,000 on Ovens 



$20,000 



If the above simple method of keeping the accounts were 
adopted the costs would be kept in a separate book, and in 
this book t^e cost-accountant might figure costs and inven- 
tory values by two or three different methods, or on two or 
three different assumptions as to the method of treating the 
by-products of the accounts, for the information of the man- 
agement. The directors could then choose which of the 
methods would be the best for obtaining unit costs to be used 
as a basis for inventories, for fixing minimum selling prices 
or for determining profits available for declaring dividends. 

There are several advantages in this method of separating 
the cost system from the accounting system. By having a 
single operating account all the actual expenditures and 
actual receipts may be posted to it from the Invoice Book, 
Sales Book, Pay Roll Book, etc., immediately after the end of 
the month and a balance sheet taken which shows the general 
course of the business. The balancing of the general books 
does not have to be postponed until estimates of costs are 
made, and no question arises as to whether the furnace shall 



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150 



BOOKKEEPING AND COST ACCOUNTING 



be charged with the coke at the market price, $3, or at $2.70, 
or at S2.40, or whether the furnace should be credited with 
the receipts from the sale of by-products, so that the book 
cost of pig iron may thereby be lowered. All these trouble- 
some questions may be avoided by the general bookkeeper 
and turned over to the cost accountant and to the manage- 
ment. 

When the market value of a by-product is a considerable 
fraction of the value of the whole product it becomes impos- 
sible to determine what is the real cost of either the principal 
product or the by-product, and the only way to fix the inven- 
tory value of either product is to take the market price less 
the estimated cost of selling, including the cost of storage, 
transportation and interest charges. Thus, if a certain mine 
produced an ore containing, at market values, $20 worth of 
gold, $10 worth of silver and $15 worth of copper per ton of 
ore, and the total cost for mining, concentration, smelting, 
refining, transportation, management and selling was $35 
per ton, the profit would be $10 per ton of ore, but the cost 
per ounce of gold or silver, or per pound of copper, could not be 
stated. 

Cost Keeping in a Rolling MiU 

Puddle Mill No. 1. Etna Iron Works. 
Pay Roll for Week ending Saturday 191 



Fur- 


Name 


Muck Bab Made Pounds 


nace 
No. 


M 


T 


W 


T 


F 


S 


Total 


Rate 


Wages 


1 
2 


J. Welsh 
T. Jones 
R. Morgan 
W.Reese 

Furnaces 
Total 




















20 

















Total tons Labor per ton $ 

Material, tons pig iron @$ 

Material, tons scrap @ 

Material, tons pig scrap (^ 

Material, tons pig ore @ 

Material, tons pig cinder <^ 

Fuel @ 

Repairs * Material (Items) 
Repairs Labor (Items) 
Charge to this week's product for repairs 
Foreman's Wages 
Other labor 
Other charges, burden (details) per ton 

Total 
Less value of cinder made 

Total cost of muck bar 

Total cost per gross ton 

The cost of refined bar is figured in the same way. The 
raw material is muck bar, charged at the puddle-mill recorded 
cost, and scrap, either purchased, drawn from other mills, or 
sheared crop ends from the bars made. All this scrap is 
usually charged at the market selling price in carload lots. 

* This charge may be an estimate based upon previous statistics. A 
memorandum account of repair is kept for the actual cost of repairs each 
week, which will be totaled as a charge to Repairs and the account will be 
credited each week with the weekly charge to Muck Bar. 



The skilled labor is commonly paid by the ton, and conmion 
labor by the day. Repairs and other burden are treated as 
in the puddle mill and a weekly statement is made showing 
the totals of raw material, labor and burden, bars and scrap 
produced, and cost per ton of refined bar made. 

MACHINE-HOnR RATES IN A STEEL WORKS 

Mr. Gershom Smith in an article in Engineering Magazinet June, 
1909, thus described the method of establishing the machine- 
hour rates which he used in the works of the Pennsylvania Steel 
Co., Steelton, Pa., about seven years earlier: 

" The first step was to ascertain the floor space of the shop 
under consideration, and to divide this space into the sum of the 
upkeep of land, depreciation of the building, the power plant 
and power-transmission machinery, also general machinery for 
common use throughout the shop, such as overhead cranes, etc., 
also expense of a general nature, such as heat, light, superin- 
tendence, non-producing labor (that is, laborers), current minor 
repairs, etc., the quotient being the yearly value of floor space 
per square foot. 

The next step was to ascertain the square feet of floor space 
occupied by each machine, and to apportion to this machine its 
pro rata share of the aforementioned items, on the basis of its 
square feet of floor space. 

In the case of a building of several floors, the floor space on 
each would have to be considered, and it is probable that the 
engineers would decide that certain floors being more valuable 
in the matter of location than others should stand a greater 
share of the depreciation of the building. 

Some machines require more clear space around them than 
others for the handling of work. Any floor space not occupied 
by machines or in operating them should be charged pro rata 
to all machines. In one shop the total square feet represented 
was 4278, the machines actually occupied 833^ sq.ft., and the 
working space allowed was 833^ sq.ft. additional, leaving 2611 
sq.ft. for aisles, storage, etc. This 2611 sq.ft. was pro rated 
to the 1667 sq.ft. apportioned to the machines so that each 
square foot apportioned was charged with the expense of a little 
over 2i actual square feet of floor space. 

Next, the depreciation on the cost of the machine itself is 
ascertained, including installation and necessary equipment such 
as counter-shaft, belting, motors, tools, and machine fixtures. 
To this must be added the proportion of cost of power, this figure 
being furnished by the mechanical superintendent and based on 
horse power, also supplies, and all expense directly applicable 
to the machine. 

Having taken all such expense into consideration, based on 
the totals of one year, the next step is to ascertain by careful 
enquiry (to be verified and if necessary corrected later from actual 
data), the number of hours per month or per annum which each 
machine will run under nornfal conditions. Having ascertained 
the number of hours per annum, we use this as a divisor, and the 
total yearly cost of the machine (ascertained as described), as 
the dividend, the resulting quotient giving the machine's hourly 
rate. As it would be impractical to operate this plan with a 
different rate for every machine in the shop, the machines have 
been divided into ten groups, with a different rate for each group 
and the machine is assigned to the group nearest to its ascer- 
tained rate. The desire is to provide a slight leeway per 
hour on each machine to cover imforeseen expenses, and 
also to provide a reserve in normal times which can be 
drawn on in subnormal times, and thus to keep the expense 
rate fairly even. 

Where owing to trade conditions the machines do not operate 
sufficient time to absorb the total expense, if there is no reserve 
to draw on, I prefer to show the deficit as a charge against the 
department income or profit and loss account, thus keeping the 
costs on a normal basis." 



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CHAPTER XVI 
MODERN ACCOUNTING SYSTEMS FOR STEEL WORKS 



A STEEL WORKS ACCOUNTS 

The following outline of accounts for a Steel Manufacturing 
Company including crucible and open-hearth, steel making, 
rolling, cold rolling, etc., has been furnished to the author by 
Mr. Albert Walton of Philadelphia, manufacturing accountant 
and industrial engineer. The general outline as far as the 
main accounts are concerned is analagous to the arrange- 
ment that would be satisfactory for a machine shop and 
foundrj", or for a large corporation ^dth varying manufactur- 
ing activities. Forms used by Mr. Walton will be found on 
pages 164 to 169. 

Some extracts from Mr. Walton's letters are given below. 

"One factor that has often been overlooked by both 
manufacturers and accountants is that of having the cost 
s^'stem an actual part of the accounting system. Many 
concerns are content to have a memorandum cost system, 
built in pa t on estimates made by superintendents and 
foremen, but I have never found such a system that would 
stand investigation or analysis. 

" A properly arranged accounting system is one that 
requires the data from which the entries into the General 
Ledgers are made up, to be established from the various 
shop and other reports, made up daily and carrying accumu- 
lative totals and balances, so that, if necessarj', it would not 
be required to wait until the end of the month to obtain a 
balance sheet, the record being in such shape that a prompt 
and accurate statement could be made at any time. The 
cost of arranging such a system is not any more expensive 
than many methods that do not even give monthly results 
and frequently only enable a Profit and Loss statement to 
be made once a year. 

" In one actual case the remodeling of the cost system re- 
sulted in a reduction of 16 clerks "in the accounting and cost 
department. Prior to the rearrangement the books were 
closed only at the end of the fiscal year, and it was necessary 
to close down the factory employing 800 men for about ten 
days to take the inventory. With a considerably reduced 
office force, they now have a monthly balance sheet and in- 
come statement, and the cost of taking inventory on Dec. 31st, 
1914, was reduced $2400.00, this being the first yearly closing 
after making the accounting and works system change, and 
at the end of this present year, 1915, there will be a further 
reduction. This shows what can be done by the elimina- 
tion of needless detail and by concentrating the work of 
the office and shop clerks in directions that result in the 



accumulation of only those data that are absolutely neces- 
sary for the cost accounts, the general books and the statis- 
tical reports. 

*' A certain company of international reputation found that 
their estimated profits on a line of heavy machinery, the sales 
of which run over $1,000,000, per year had not materialized. 
They were doing business with absolutely no attempt to 
arrange their estimate in detail that could be satisfactorily 
compared Tvith the cost of manufacture of the machines. 
They had not kept costs of manufacture in detail by kind of 
machines built, and of course had paid no attention to the 
costs of parts of individual machines, so that whether certain 
machines were made profitable and others at a loss was 
unknown. 

*' Their real mistake was in accepting large orders, based 
upon the guesses of their engineers as to what the work could 
be gotten out for — and accepting their estimates with too 
much assurance that the figures were correct. Their engineers 
are good designers but very poor estimators. In this case 
there was a loss that ran into over $100,000 that could have 
been prevented had attention been paid to detail costs and 
the proper detailing of estimates. ^ 

" A simple but very satisfactory method of routing work is 
in effect at one plant, all output being scheduled practically 
three months in advance, and weekly sub-schedules issued for 
the shop to work to; planning boards are not used, but a 
special form of job ticket follows the work through the shops, 
being carried in a special holder (see Fig. 16, page 167) on the 
truck. There are 200 standard size trucks used for handling 
work, and there has been worked out a system, whereby a 
truck load of parts constitutes an order, and this truck starts 
from the foundry or stock room, and after passing through all 
necessary shop departments winds up either at the erecting 
department or at the finished part store room. 

" The tickets are made out in advance in the Production 
Department from the Production Schedule book, in which 
is predetermined the quantity of parts to be brought through 
each week of the year. This card is sealed in a holder with 
celluloid front that is attached to the truck; the only column 
open for use of the workman is the one headed " operatives,'* 
thus preventing the changing of any figures by the operator, 
the inspector only having access to the card record and he 
being furnished with pliers and lead rivets for opening and 
resealing the holders. The use of this holder did away with 
a great many abuses that had existed prior to properly safe* 
guarding the cards." 



151 



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152 



BOOKKEEPING AND COST ACCOUNTING 



Ledger Accounts-^Analysis of Entries Thereto and Account Symbols for a Company Operating Steel Furnaces, Rolling 

Mills, etc. By Albert Walton. 
CHART OF LEDGER ACCOUNTS AND SYMBOLS 





. 


ASSETB 






LxABIUTISfl 




Loss AND Gain 




• 
'profit 




A 
Current. 


B 
Inventory. 


C 
Fixed. 


D 
Current. 


E 
Reserve. 


P 
Capital. 




Revenue. 


H 
Cost. 


J 
Expense. 


and 
1 Loss. 


1 

2 


Cosh 

Petty Cash 
No. 1 

Treasurer's 
Fund 

Accounts Re- 
ceivable 

Bills Re- 
ceivable 

Unexpired 
1 Insurance 

Outside Se- 
curities 

Cash Ad- 
vanced to 
Branches 

Unexpired 
Taxes 


Melting Stock 

Crucible 

Ingots and 

Billeta 
O. H. Ingots 

and Billets 

(Made) 
0. H. Ingou 

and Billets 

(Purchased) 
Billet Cost 

Adjustment 
Work in 

Process 
Finished 

Stock 
Finished 

Stock on 

Order 
Wire Dept. 

Stock 

Wire Dept 
Process 
Stock 

Wire Dept. 
Finished 
Stock 

Fuel 

Melters Sup- 
plies 

General Stores 

Stock Adjust- 
ment 

Scrap 


RealEsUte 
Buildings 

Machinery 
and Equip- 

Branch Prop- 
erty 


Accounts 
Payable 

Notes Pay- 
Payable 

Accrued Int. 
on Bonds 

Accrued 
Taxes 

Accrued Pay 

RoU 
Dividend 

Income Tax 
Deducted 
• Deferred 
Charges 

Private 
Accounts 


Depreciation 

Relining 
Furnaces 

RoUs 
Contingencies 


Capital stock 
Bonds 

Surplus 


From Outside 
Securities 

Discount on 
Purchases 

Interest 
Received 


Cost Adjust- 
ment 


Discount on 

Sales 
Executive 

Expense 

Sales Expense 1 

Claims and 
Allowances 

Freight 
Allowed 
Interest Paid 

XnndP 

Expense 

Ledger 

Accounts, 

X 20 to 614 

P 60 to 4024 

(see list in 

following 

pages) 

1 


K.L 

1 


3 






4 






5 


Sales A 
Sales B 
Sales C 
Sales D 

Sales £ 

Sales F 

Sales 

Sales tf 


Cost of 
Sales X 
Sales B 

Sales C 

Sales Z) 

Sales £ 

Sales F 

Sales G 

Sales & 




6 










7 











8 






1 




9 






1 

1 

1 
j 




10 


1 








II 


1 
























13 














14 






15 












20-22 




Warehouses 


















1 











Acer. 
Symbol 



EXPLANATION OF ACCOUNTS 



Account 



Acer. 
Symbol 



Account 



Al CASH 

(Financial Ledger) 
Sub-accounts, AIa, A 1b, etc., for various Branches. 
Analysis of Entries 

Debit al end cf month with: 
Cash received and deposited in banks during the month. 
See Cash Received Book for details. 

Credit ivith: 
The amount of checks issued during the month (entries 
made at end of month). See Check Register for details. 

Balance: The available cash in Banks at end of month. 

A2 PETTY CASH No. 1 

(Financial Ledger) 
DdniwUh: 

Amoimt placed in fund to meet ciurency requirements. 
Credit tcith: 

Disbursements from the fund, as per Petty Cash Book. 
Balance: 

Funds on hand to meet petty cash disbursements, and pay roll 

advance payments. 



A4 TREASURER'S FUND 

(Financial Ledger) 
D^nt wUh: 

Moneys issued to meet Treasurer's special disbursements. 
Credit xmih: 

Disbursements made. Details in Treasurer's private Journal. 

A6 ACCOUNTS RECEIVABLE 

(Financial Ledger) 
Debit with: The total Charge Sales at the end of each month. 

Credit with: 

a. Footings of "Accoimts Receivable" column of Cash Re- 
ceived Book, at end of each month. Includes all pa3m:ients 
received from customers plus the discount allowed. 

b. Allowance to customers for goods returned. Claims al- 
lowed, etc. charged to Mdse. or to Profit and Loss. 

c. Accoimts that are uncollectible, charged to Reserve for 
Bad Debts or to Profit &nd Loss. 

Balance: The amount due and collectible from customers. 
Should agree with the result of a trial balance of customers' 
ledger cards. 



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MODERN ACCOUNTING SYSTEMS FOR STEEL WORKS 



153 



Acer. 
Symbol 



AccotJNT 



Acer. 
Symbol 



Account 



A6 BILLS RECEIVABLE 

(Financial Ledger) 
Analysis of Entries 

DehUwith: 

The face value of notes received from others. 
Credit toUh: 

The face value of notes received from others that have been 

paid, discounted, or otherwise disposed of. 
Balance: 

Represents the face value of notes on hand. 



A7 



UNEXPIRED mSURANCE 

(Operating Ledger) 



Debit with: 

Cost of Insurance (from Accts. Payable Book). 
Credit with: 

The monthly proportion of insurance premiums that have 

l)een charged to this accoimt, the proper Operating Expense 

Accoimts being charged. 
Balance: 

Represents the Cost of Unexpired Insm-ance. 



A8 



OUTSIDE SECURITIES 

(Financial Ledger) 



Debit with: 
Cost of Stocks and Bonds of other companies purchased or 
acquired. 

If deemed advisable to depreciate at any later period the value 
of such stocks when first acquired, charge Profit and Loss 
with the difference between actual cost and the Company's 
valuation. 

Credit with: 
Cost (or valuation) of Stocks and Bonds of other companies 
sold. The difference between the Cost (or valuation) and 
Selling price should be charged or credited to Profit and 
Loss Account. 

Balance: 
Represents the Company's valuation of Stocks and Bonds 
of other Companies on hand. 

A9 CASH ADVANCED TO BRANCHES 

(Financial Ledger) 
Sub 
Accts. 

A9a Branch 

A9b 

A9c 

DebUunth: 

All items of Cash Advanced to Branches. 
Credit vnth: 

Disbursements made by Branches from this fund, debiting the 

various accounts chargeable therewith, as per the distribution 

furnished by Branches. 

Balance: 
Unexpended cash in hands of Branches at the time their 
report of disbursements was made. 

NoU: 
Branches should make report of their disbursements as of the 
last day of each month and mail it to the main office not later 
than the first business day of the succeeding month. 



AlO UNEXPIRED TAXES 

(Operating Ledger) 

DebUwUh: 
Amount of taxes paid. 

Credit with: 
The monthly proportion of taxes charged to operating expense 
accoimts. 

Balance: 
Amount of taxes paid but not yet charged to operating 
accounts. 



B 



FACTORY OPERATING ACCOUNTS 



Bl Melting Stock 

B2 Crucible Ingots and Billets 

B3 O-H Ingots and Billets, Own Make 

B4 O-H Ingots and Billets, Purchased 

B5 Cost Adjustment 

B6 Mill, in Process 

B6a Mill Cost Adjustment 

B7 Finished Rolled Product, Warehouse A 

B8 Finished Rolled Product, Warehouse B 

B9 Wire Dept. Stock 

BIO Wire Dept Process Stock 

Bll Wire Dept Finished Stock 

B12 Fuel 

B18 Melters' Supplies 

B14 General Stores 

B15 Stock Adjustment 

B16 Scrap 

Debit with: 
a. Cost of Material purchased. 
6. Cost of Inbound Freight on Materials, 
c. Pay Roll and other expense in connection with fabricating 
material in process. 

Credit with: 
a. Cost of Materials transferred to other accoimts while in 

process of fabrication and when finished. 
6. Cost of Materials sold, at which time the proper Cost of 
Sales accoimt will be charged. 

Balance: 
Represents the Cost of Materials on hand. 

NoU: 
The debits and credits to the various accoimts for materials 
transferred to other accounts during process or when finished 
and delivered to finished stock B7, B8, Bll, will be compiled 
from the current records and reports furnished by each depart- 
ment, and from the distribution of pay roll and other expenses. 
Journal entries will be made at the end of each month cov- 
ering these various transfers. B5, Cost Adjustment, will be 
used as a balancing accoimt to take up the differences between 
actual prices paid for or actual costs of rolled billets and the 
estimated values that may at times have to be used when the 
billets are worked up prior to the receipt of outside invoices or 
of the approval of them in case of a price dispute, and when the 
cost of billets of our own makes are not obtainable until after 
the end of a current month. In these cases the entries will 
be as follows: 



Example. 

Dr. 



Billet Account 




Digitized by 



Google 



154 



BOOKKEEPING AND COST ACCOUTTTING 





Dr. 


BiLLST CoBT Adjustment 


Cr. 


(1) 

(3) 


1000 
146 


]•" 


1146 




Dr. 


Mill in 


Procem 


Cr. 


(2) 




1146 


1 





In entry No. 1, it is assumed that certain billets of a value 
estimated at SIOOO are used from stock for a specific rolling 
order. At the end of the month the true cost is found to be 
S1146, this amount is credited to Billet Cost Adjustment and 
debited to Mill in Process Account as per entry No. 2. The 
credit balance of S146 will be closed into Billet Account as 
shown in entries No. 3. A clear record of the transactions is 
thus made. This refinement in accoimting applies principally 
to mills rolling short orders for special specification steel where 
it is necessary to estimate the cost prior to the end of a month. 
Example' 

Dr. B 20 Warehouse (New York) Cr. 



ToB 7 


100 tons BiUets @ 26 


2600 


By Cost of Sales. Class A, 
50 tons® 27 (1) 


1350 


ToB II 


100 tons Wire ® 30 


3000 


By Cost of Sales. Class B. 
50 tons @ 31.50 (1) 


1575 


To J 3 


Sales Warehouse Exp. 


250 







This entry is typical of the method of charging stocks received 
from the Home Warehouse to Inventory Accounts at the trans- 
ferred Cost Value, to which is added the monthly charges 
covering the cost of the selling expense of the Branch Ware- 
house. This addition to cover Branch expenses, freights, etc., 
caUs for the establishment of a higher cost of sales, and this 
has been assumed in the above entry to be covered by $1 per 
ton on billets £uid $1.50 per ton on wire. 
Subsequent entries will then be as follows: 

Dr. (H 5 and H 6. Cost) Sales (G 5 and G 6. Revenue) Cr. 



To B 20 (1) H 5: 
ToB 20 (I) H6; 



Cost Billet Sales 
Cost Wire Sales 



1350 
1575 



(2) G 5. Sales Billets 
(2) G 6. Sales Wire 



1500 
1800 



Dr. 



A 5. Accounts Receivable 



Cr. 



Sales. G 5 and 6 



3300 



These entries explain the method of crediting Warehouse, B20, 
and debiting the proper Cost of Sales accounts H5 and H6, 
also the crediting of the proper Sales Revenue accounts G5 
Euid G6, and debiting Accounts Receivable, A5. 
The subsequent entries to cover the adjustment of claims and 
aUowances to customers will be found under Claims and Allow- 
ances, J4. 

Accounts H5, H6, Cost of Sales, and G5, G6, Sales (Revenue) 
will be closed at the end of a fiscal year. At the end of each 
calendar year the debit balance in H&-6 and the credit balance 
in G5-6 will, when compared with each other, set up the Gross 
Profit on Sales, and in making up a Monthly Income State- 
ment would show as follows: 





For Month 


%of 
Cost 


For Year 
to Date 


%of 
Cost 


Gross Sales 

Less Cost of Sales 


$135,000 
114.000 


16.4 


642.715 
503.400 






21.000 


139,315 


27.6 



B6-a, Mill Stock Adjustment, represents a balancing account 
to prevent undesirable fluctuations in Mill Stock Accounts, 
due to Mill Report errors. It is an account similar to Billet 
Cost Adjustment and it is used in the same manner where it 
is necessary to estimate the cost of rolling prior to the actual 
monthly cost being established. Outside purchases, however, 
do not enter into consideration. The accoimting for a 
specific case would be as follows: 



Dr. 


B 6. 


Mill 


IN Process 


Cr. 




! 




1 

(1) 
' (3) 

1 


1 

j SIOOO 

1 50 

1 


00 
00 



Dr. 



B 6a. Mill Cost Adjustment 



Cr. 



(1) 
(3) 



SIOOO 
50 



(2) 



$1050 



00 



B 7. Warehouse (Finished rolled steel) 




Entries No. 1 and 2 are made during a month; after the cost 
is established early in the following month, the correcting 
entry No. 3 is made. 

Accounting entries covering the roUing of ingots into billets 
and of billets into finished Rolled Product: 



Dr. 



B 6. Mill in Process 



Cr. 



(1) Billets 
(1) Ingots 

(4) Pay roll 

(5) Expense (overhead) 


1380 
1000 
200 
200 


(2) Finished product 
(6) Scrap 

(3) BilleU (roUed) 


1600 

30 

1150 




(2) 




Dr. 



D 5 Pay roll 



Cr. 




200 




This entry shows the source of the various entries establishing 
the debits and credits of B6, Mill in Process, and it is assumed 
that all the expense debited thereto has been absorbed by the 
product and scrap made. In actual practice there will be a 
balance of work in process to carry forward into the succeeding 
month's account. 



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MODERN ACCOUNTING SYSTEMS FOR STEEL WORKS 



155 



Stock Adjustment 

This account will be debited or credited with the amount of 
any important errors, discovered during a year to have been 
made in the physical inventory taken at the end of the previous 
fisca] year, which it would not be correct or advisable to 
debit or credit to specific current inventory accoimts. At 
the end of the current year the balance in Stock Adjustment 
Account should be debited or credited to Surplus Account, 
thus withdrawing the correction from the current year's 
statements as to operating results, that should not be affected 
by errors applying to the preceding year. 



Acer. 
Symbol 



Account 



B20 New York Warehouse 

B21 Chicago Warehouse (Consigned Stock) 

B22 San Francisco Warehouse (Branch Acct.) 

Analysis of Entries 
DibUwUh: 
Cost of Materials transferred from Stock Accoimts B7 and Bll. 

Credit mth: 
Cost of Materials sold, at which time the proper Cost of Sales 
account will be charged. 

Balance: 
Represents the cost of materials on hand. 

Note: 
Materials carried at outside Warehouses are billed to them at 
cost. When sales are made from these stocks in addition to 
crediting the specific Warehouse Stock, the Cost of Sales 
Account (proper subdivision) should be charged with the cost 
of the specific sale — and Gleneral Sales (proper subdivision) 
should be credited with the billing value. This will then bring 
all sales into General Sales Account, and 8et up the Gross 
Profit on the Company's business. If it is desired to maintain 
a separate identity for each Outside Warehouse and credit 
the sales made from each to its own account it can be accom- 
plished by carrying sul)sidiary Sales Accounts for each outside 
Warehouse, treating them as follows: 

Entries Covering Transactions at Branch Warehouses 
Branch Warehouse Account 

Dd)it with: 

a. Cost of materials transferred to Branch. 

b. Warehouse expense, salaries, commissions, insurance, freight, 

etc. (This may be on a percentage basis to maintain 
a fair distribution of expense.) 

CTedit inih: 
Cost of sales made, as established at Branch, so as to ensure 
a fair cost of sales f .o.b. Branch. 

Balance: 
Represents the cost value of stock on hand. 

Note: 
The sales for the month will be credited at billing value and 
charged at the transfer value plus the proper proportion of 
Warehouse Expense. The difference between this revised Cost 
and the billing value will give the Gross Profit on such sales. 

INVENTORY SUB-ACCOUNTS 

The Inventory Accoimts Bl to B24 represent the principal or 
controlling inventory accounts and each is subject to further 
subdivision as deemed necsesary: 

For example: Bl, Melting stock may be subdivided as follows: 
Bla. Melting Bar. 



b. Shovel scrap, pimchings, etc., purchased. 

c. Own make scrap. 

d. Ferro-manganese. 

e. Ferro-siUcon. 
/. Timgsten. 

g. Vanadium, etc. 
Similarly other divisions would be established on form necessary 
to cover the different kinds of finished Rolled steel. Fuel, 
General Stores, etc. The Inventory Account B3 and B4 may 
be divided into: 

B3a, O-H Ingots — Own make. 

B3b, O-H Billets— Own make. 

B4a, O-H Ingots — Purchased. 

B4b, O-H Billets—Purchased. 
In the detail accounting this would be done — even though for 
balance-sheet purposes they were combined together. 



Acer. 
Symbol 



Account 



CI 



REAL ESTATE 



(Operating Ledger) 

Dc6i7 with: 
a. Cost of land purchased. 

h. Cost of surveying, title insurance, recording fees, etc. 
c. Cost of important improvements, i.e., grading, construct- 
ing roads, etc. 

Credit with: 
Cost of land sold. Profit or Loss on sales of real estate entered 
in this account, but if land is sold Profit and Loss Acooimt would 
be credited with profit or charged with loss, resulting from the 
sale. Example : If land cost $10,000 and sold for $15,000 cash, 
the Journal Entry would be Cash $15,000, To Real Estate 
$10,000, To Profit and Loss $5000. 

Balance: 
Represents cost of land owned. 



C2 



BUILDINGS 



(Operating Ledger) 
Dd>it with: 

o. Actual Cost of buildings purchased or constructed. 

h. Cost of replacing buildings, or important parts thereof, 

destroyed by fire, fiood, etc., or on account of ordinary wear 

and tear. 
Credit with: 

Cost of buildings replaced (if any) at which time Reserve for 

Depreciation (Buildings) should be charged. 
Balance: 

Represents cost (or appraised value) of Buildings owned. 

Example of Account C-2. Original cost of building, $20,000. 
Depreciation Reserve, Cr. balance, $4000. Present net value, 
estimated, $16,000- Damage by fire, estimated, $8000. Re- 
ceived cash from Insurance Co., $6000. Repaired damage at 
cost of $10,000. Appraised value of building now $18,000. 
Required the entries to be made: 

C2. Buildings 



Jan. 1 
Junes 


Balance, Cost 
To Cash (repairs) 

To Balance 
(present value*^ 


$20,000 
10,000 


Mar. 20 

June 5 
June 30 
June 30 


Hy Cash from 

Ins. Co. 
By Depn. Reserve 
By Profit and Loss 
By Balance 


$6,000 
4.000 
2.000 

18,000 




$30,000 


$30,000 


July 1 


$18,000 





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156 



BOOKKEEPING AND' COST 'ACCOUNTING 



E 1. Depreciation Reserve 



June 3 



To Buildings 



$4,000 



Jan. 1 



Cr. Balance 



Acer. 
Symbol 



Account 



$4,000 



ACCT. 

Symbol 



Account 



C3 MACHINERT AND EQUIPMENT 

(Operating Ledger) 
D^bU wUh: 
a. Cost of all machinery and equipment purchased or built. 
h. Cost of first installation, but not subsequent installations 
due to changes which do not add to asset value, which should 
be charged to Operating Expense. 

c. Cost of additions and alterations, only however when such 
changes increase the original efficiency of machine or equip- 
ment. 

d. Cost of new Machinery or of replacing machinery or equip- 
ment scrapped or sold on account of wear or obsolesenoe. 

Credit with: 
a. Cost of any machinery or equipment sold the difference 
between the cost and the amount it sold for being charged 
against Reserve for Depreciation Account (Machinery and 
Equipment). 

6. Cost of any Machinery and Equipment replaced or scrapped, 
Reserve for Depreciation Accoimt (Machinery and Equip- 
ment) being charged. 

Balance: 
Represents the cost of Machinery and Equipment on hand. 

C4 BRANCH PROPERTY 

(Operating Ledger) 

Debit vntk: 
Actual cost of property owned. 

Credit vnik: 
Cost of any property sold, the difference between the cost and 
the amount it sold for being charged against Reserve for De- 
preciation account. If the Reserve is insufficient charge the 
deficit to Profit and Loss. 

Balance: 

Represents cost of branch property owned. 



Dl 



ACCOUNTS PAYABLE 



(Financial Ledger) 
Debit with: 

a. Footings of ''Accoimts Payable" column per Check Register 
(Entry to be made at end of month). 

b, Amoimts allowed by creditors for materials returned, 
damaged, etc. 

Credit vnth: 

Footings of " Accounts Payable " column per Voucher Record 

(Entry to be made at the end of month). 
Bcdance- 

Represents the amoimt owing to creditors for Materials, etc., 

purchased, and should agree with the aggregate amount of 

impaid Vouchers. 

Da NOTES PAYABLE 

(Financial Ledger) 
Debit toith: 

The face value of all notes redeemed. 
Credit tvith' 

The face value of all notes issued. 
Balance: 

Represents the aggregate face value of notes payable out^ 
^ standing. 



D3 ACCRUED INTEREST ON BONDS PAYABLE 

(Financial Ledger) 
Debit with: 

Payments of interest on outstanding Bonds. 
Credit ivith: 
, Interest accrued for the month on outstanding Bonds (entry 

made at end of month), charging Profit and Loss. 
Balance: 

Represents the amount of interest accrued but not due. 

D4 ACCRUED TAXES 

(Financial Ledger) 
DMt with: 

Amount of Tax Bills when they are paid. 
Credit with: 

Estimated monthly proportion of taxes, at which time debit 

the various Operating Expense Accoimts to which taxes are 

charged, with the proportion proper to each. 
Balance: 

Represents Estimated Taxes accrued but not due. 

D5 ACCRUED PAYROLL 

(Operating Ledger) 
Dd>it loith: 

All payments for labor. 
Credit wUh: 

a. Labor charged to Productive Accounts. 

h. Labor charged to Non-Productive Accounts. 

c. Salaries not paid from Treasurer's fund. 
Balance: 

Represents pay roll accrued but not due for payment. 

D6 DIVIDENDS 

(Fioancial Ledger) 
Debit with: 

Dividends paid. 
Credit with: 

Dividends declared. 
Balance: 

Represents dividends due but not paid. 

D7 INCOME TAX (Deductions)* 

(Financial Ledger) 
DdyitwUh: 

Items of Income Tax deducted from Salaries and paid to the 

Government, Cash being credited. 
Credit with: 

a. Any adjustments that may be necessary. 

6. Amount of Income Tax return 'made to the Government. 
Balance: 

Will represent the amount of Income Tax CoQected but not 

remitted, 

* Example of Entries to D7, Income Tax: 

Mfg. a/o To Salaries 500 

G.M'8 Sal. for March 500 

Salaries To Income Tax 60 

I % Deducted from Q.M's Sal. for year 60 

Salaries To Cash 440 

Bal. pd. G.M. 440 

Income Tax To Cash 60 

Paid to Govt. 60 



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MODERN ACCOUNTING SYSTEMS FOR STEEL WORKS 



15? 



Acer. 
Symbol 



Account 



D8 DEFERRED CHARGES 

(Financial Ledger) 

DOnt with: 

Amount of bonus set aside as due specific employees, Accrued 
Pay roll being credited. 

CredU with: 

Amoimts of bonus paid to specific employees, Operating Ex- 
pense being charged. 

Balance: 

Will represent Bonus set aside but not yet paid to employees. 



D9 



PRIVATE ACCOUNTS 



(Financial Ledger) 

Debit with: 
Amounts paid to employees chargeable to their private account, 
crediting Cash. 

Credit with: 

Amounts as established by properly approved traveling and 
other expense vouchers, and with cash returned, expense 
accounts or Cash being charged. 

Balance: 
If a debit will represent the total amoimt of Company's fund 
in hand of employees, as traveling and special expenses, that 
have not been accounted for to date, and will be transferred 
to the Asset side of a balance sheet. If a credit will represent 
a liability. 

El RESERVE FOR DEPRECIATION 

Sub 
Accts. 

El A Reserve for Building. 
ElB Reserve for Machinery and Equipment. 
(Operating Ledger) 

Dd>U with: 
a. Cost of replacing building, machinery and equipment, or 
important parts thereof, at which time credit Building or 
Machinery and Equipment Account. 

h. Difference between cost and selling price of Buildings, Ma- 
chinery or Equipment sold, the proper asset account, C2 or 
C3 being credited. 

c. Cost of Buildings, Machinery or Equipment discarded or 
scrapped, the proper asset account, C2 or C3, being credited. 

CredU with: 
At the end of each month one-twelfth of the total estimated 
depreciation for the year, at which time debit the various 
Operating Expense Accounts to which Depreciation is charge- 
able with the proportion proper to each. 

Balance: 

Represents the available Reserve for Depreciation. When com- 
piling a Balance Sheet the balance of this account should be 
deducted from the Asset Accounts C2 and C3, in order to show 
their estimated present value. 

Note: 

At the end of fiscal year any difference between the estimated 
depreciation charged off monthly and the actual depreciation 
as established at close of year will be adjusted through Profit 
and Loss Account. 

B2 RESERVE FOR RELINING FURNACES 

Sub 

Accts. 

E2a Relining 0-H Furnace. 

£2b Relining Crucible Furnace. 

(Operating Ledger) 
DOrit with: 
Cost of relining Furnaces (except for unimportant and minor 
repairs which will be absorbed in Operating Expense) crediting 



Pay Roll and Material accounts with their respective portions 
of relining expense. 

CredU wUh: 
The estimated monthly charges to Operating Expense Accounts 
to which rebuilding furnace expense is chargeable. 

Balance: 
Represents the available reserve for rebuilding Furnaces. 

Note: 

At the end of the fiscal year any debit or excessive credit 

balance in Reserve for Rebuilding Furnace Account should 

be closed out as follows: 

a. If a debit balance by charges to Operating Expense Accounts 
sufficient to close out the debit balance and leave a 
reasonable credit balance to carry over into the succeed- 
ing year. 

6. If an excessive credit balance by credits to Operating Ex- 
pense Accounts and debits to Reserve for Rebuilding 
Furnaces of an amoimt sufficient to close out the excess 
portion of the credit balance. 

c. The division of such adjustment between Open-Hearth and 

Crucible Operating Expense Accounts will be based 
upon the experience gained during the year and the 
amount of rebuilding that has been necessary. 

d. It will be proper to carry forward at the end of each year 

a reasonable credit balance in Reserve for Rebuilding . 
Furnace Account, the amount depending upon the phys- 
ical condition of the furnaces at that time and repre- 
senting the approximate cost of restoring them to first 
class condition. 



Acer. 
Symbol 



Account 



E3 RESERVE FOR ROLLS 

(Operating Ledger) 

Debit wUh: 
The Cost of making new and changing and repairing old rolls, 
Pay Roll and Material accounts being credited with their re- 
spective portion of this expense. 

CredU wUh: 
The estimated monthly charge to Mill Accoimts to which Roll 
expense is chargeable. 

Balance: 
Represents the available reserve for providing new and repair- 
ing old rolls. 

NoU: 
At the end of a fiscal year any debit or excessive credit balance 
in this account will be adjusted in a manner similar to that 
arranged for the account Reserve for Rebuilding Furnaces E2. 



E4 RESERVE FOR CONTINGENCIES 

Sub 

Accts. 

E4a Special and General Expenses. 

E4b Strike Expenses. 

E4c Special Experiments and Investigations. 

E4d Patent Litigation and Expenses. 

'EAr Bad Accounts. 

E4f Bonus to Employees. 

E4q Extraordinary Repairs and Renewals. 

(Financial Ledger) 
DebU wUh: 
All expenses of such kinds as it has been determined to pro- 
vide for through this reserve. 



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158 



BOOKKEEPING AND COST ACCOUNTING 



Credit with: Acer. 

An Estimated monthly charge to Operating Expense Accounts Symbol 

of Manufacturing departments. On special occasions when 

it is anticipated that extraordinary charges may be pending F3 
against this account it will be proper to raise sufficient credit 
in the account to meet them by direct charges to Profit and 
Loss. 

Balance: 
Represents the available reserve for Contingencies. 

Note: 

The purpose of the Reserve for Contingencies is to provide for 
certain expenditures that will have to be met at specified 
times and for others that may be unforeseen. The principal 
expenditures that will be paid from this reserve are as follows*: 

E4a. Special and General Expenses, 
Will include payments made to special agents for services and 
expenses while engaged on special work not connected with 
current operations and construction, also payments to em- 
ployees and others in consideration of extra services in direc- 
tions that are beneficial to the Company's interests. 

E4b. Strike Expenses. 

E4c. Special Experiments and Investigations. 
Will include special experiments and investigations that may 
affect Operating and Sale Departments, but which will not 
be charged thereto unless the experiment or investigation 
accrues ultimately to the credit of such Departments, when 
it will be proper to credit this Account E4c, and charge the 
department benefited thereby with all or a portion of the 
expense as may be deemed advisable. 

E4d. Patent Litigation and Expenses. 
Will include all expenses connected with protecting or securing 
patents and patent rights. Amounts paid for patents pur- 
chased may be charg^ to this account. 

E4tR. Bad Accounts. 
Will include all imcoUectible accounts receivable charged off. 

E4f. Bonus to Employees. 
Will include bonus amounts paid to employees who participate 
in the division of bonus based upon the net profits on a year's 
operations. 

E4q. Extraordinary Repairs and Renetvals. 
Will include the cost of such repairs and renewals that are Q3 
extraordinary in character and which, if charged into the 
current cost of operations would unduly increase it. This 
account will not include the rebuilding of Open-Hearth and 
Crucible Furnaces, and the replacing of broken Rolls, which 
are taken care of through special reserve accounts. 

Acer. 

Symbol Account 



Account 



Fl CAPITAL STOCK 

(Financial Ledger) 
Analysis op Entries 
Debit with: 

Par value of shares retired. 
Credit with: 

Par value of shares issued. 
Balance: 

Represents par value of stock outstanding. 

F2 BONDS 

(Financial Ledger) 
Debit with: 

Amount of Bonds retired. 
Credit with: 

Amount of Bonds issued. 
Balance: 

Represents amount of bonds outstanding. 



SURPLUS 

(Financial Ledger) 
DebU wUh: . 
Dividends declared, at which time credit Dividend account. 

Credit with: 
Net Profit as shown by Profit and Loss Account after the 
closing entries have been made, at which time Profit and Loss 
account should be charged, thus causing the latter account 
to balance. 

Balance: 

Represents the accumulated net profits to and including the 
last closing period, less any dividends paid. 

Gl mCOME FROM OUTSIDE SECURITIES 

(Financial Ledger) 
Debit xcUh: 
Losses sustained on Stocks sold. 

Credit with: 

a. Income (dividends) received from Stocks owned. 

b. Profits realized from Stock sold. 

Balance: 
Represents net income from Stocks of other Companies. 

G2 DISCOUNT ON PURCHASES 

(Financial Ledger) 
DebU with: 
Discounts taken but not allowed by creditors. 

Credit with: 
Footings of "Discount" column in Check Register book (entries 
made at end of month). This footing represents cash dis- 
counts allowed by creditors. 

Balance: 
Represents Net Discounts on Purchases. 



INTEREST RECEIVED 

(Financial Ledger) 



DebU wUh: 

Any adjusting entries. 
Credit with: 

All interest received on past due accoimts. 
Balance: 

Will be transferred to Profit and Loss accoimts at closing 

period. 



G5 to G12 



GENERAL SALES 



(Representing Division of Sales by classes of goods, 
inclusive.) 



AtoH 



(Financial Ledger) 

Debit with: 
The debit side of this account will be kept in the Operating 
Ledger and will be known as Cost of Sales Accounts H5 to 
m2 inclusive. 

Credit with: 
The billing value of Sales made during month (both cash and 
charge sales). 

Balance: 
When the Cost of Sales Accoimt (kept in Operating Ledger) 
is deducted from the credit postings in general Sales Accoimts 
the balance will represent Gross Manufacturing Profit on 
Sales. 



Digitized by 



Google 



MODERN ACCOUNTING SYSTEMS FOR STEEL WORKS 



159 



Acer. 
Symbol 



Account 



Acer. 
Symbol 



Account 



HI 



COST ADJUSTMENT 

(Operating Ledger) 



Analysis of Entbies 
Ddfit or Credit with: 

a. Such adjustments as are necessary on account of using 

arbitrary prices in establishing cost values. 
6. Gains of losses on Sales which at the time of Sale were 
credited to cost at an arbitrary price. 

Will be closed out to Profit and Loss at closing periods. 

Note: 

Cost adjustment entries will be adjusted from time to time, 
the basis for adjustment being value instead of tonnage as 
the former more nearly represents the most equitable basis. 
The postings to this account will come from all Producing 
Depts. and the detail of the account should be kept on sup- 
porting sheets in such manner as to show each department's 
cost adjustments separately. 
. i 

H5 to H12 COST OF SALES 

(Representing Classes of Goods, A to H inclusive). 
(Operating Ledger) 

Debii vnth: 

a. Cost of Sales of Product shipped each month. 

b. Gross profits taken on Product sold and afterwards returned 
by customer. 

Credit with: 
The credit side of this accoimt will be kept in the Financial 
Ledger and will be known as General Sales Account G5 to 
G12 inclusive. 

Balance: 
The debit postings in these accounts will offset the credit 
postings in General Sales Accounts, the credit balance remain- 
ing in the latter accoimts representing Gross Manufacturing 
Profits on Sales. 

Jl DISCOUNT ON SALES 

(Financial Ledger) 

Debit inth: 
The footing of " Discount '* colunm in Cash Received Book 
(entry made at end of month). This footing represents cash 
discounts allowed to customers. 

CredU wUh: 

There will be no credits to this account excepting possibly 
readjustments for corrections of discoimts revised. 

Balance: 

Represents Net Cash Discounts allowed to customers. 



J2 



EXECUTIVE EXPENSE 
(Financial Ledger) 



IMjiiwUh: 

a. All exi)enses chargeable to Executive Dept. 

5. All expenses that are general to the Company's business 

as a whole and not directly chargeable to other accounts. 

CredU with: 
Any items that should result in diminishing the charges to 
this account. Charge Factory Operating Accoimt B with the 
proportion of J2 that belongs to the factory. 

Balance: 
Represents Net Executive Expense. 



J3 SALES EXPENSE 

(Financial Ledger) 

D^bU with: 
All expenses connected with maintaining the Selling Depart- 
ment. 

Credit vnth: 
Any items that should result in diminishing the charges to 
this accoimt. 

Balance: 

Represents Net Sales Expense. 



J4 



CLAIMS AND ALLOWANCES 



(Financial Ledger) 
DMtwith: 
Allowances to customers for product returned, claims allowed, 
etc., at the same time credit Accounts Receivable. 

Credit with: 
All adjusting entries which will represent debits to stock and 
scrap accounts for salvage value of material returned; debiting 
General Plant Expense for manufacturing loss sustained, and 
debiting the proper sale accoimts for loss of profits thereby. 

Balance: 
Will represent the volume of claims and allowances not dis- 
posed of. 

J5 FREIGHT PREPAID AND ALLOWED 

(Financial Ledger) 
D^yit with: 
Freight prepaid and allowed on shipments. 

Credit with: 
Correcting entries if any affecting previous debits. 

Balance: 
Represents Net amount of Freight prepaid and allowed on 
shipments. 

J6 INTEREST PAID 

(Financial Ledger) 
Debit tffith: 
All interest items on Notes Payable. 

Credit with: 
Any adjusting entries. 

Balance: 
Will represent the amount of interest paid. 



Kl 



PROFIT AND LOSS 



(Financial Ledger) 
Debit with: 

a. Such items of expense as cannot be properly chargeable to 
any other account. 

b. With closing entries at closing periods. 
Credit with: 

a. Such items of expense as cannot be properly credited to 
any other account. 

b. With closing entries at closing periods. 
Balance: 

After all closing entries have been made the balance in this 
account will represent the Net Profit for the period and should 
be transferred by Journal Entry to Surplus Account. 



Digitized by 



Google 



160 



BOOKKEEPING AND COST ACCOUNTING 



Acer. 
Symbol 



Account 



Acer. 
Symbol 



Account 



SUB ACCOUNTS OF LEDGER ACCOUNTS 

To be kept in Subsidiary Jiedgers and closed into the Controlling 
Accounts in Operating and Financial Ledgers at end of each 
month. 



Bl^l 


PAINTS 


B1^2 


REFRACTORIES 


Bl^-3 


ELECTRICAL MACHINERY AND SUPPLIES 


BU-h4 


PIPE FITTINGS 


B14-6 


MISCELLANEOUS STORES 


B14-6 


OILS AND GREASES 


B1^7 


LUMBER 


B14-8 


STATIONERY 


B1^9 


MISCELLANEOUS CASTINGS 


Bl^lO ROLLS 


BU-11 PATTERNS 


B1^12 MACHINERY AND EQUIPMENT 


Bl^ia NEW CONSTRUCTION 


B12-1 


ANTHRACITE COAL 


B12-2 


BITUMINOUS COAL 


B12-8 


GAS COAL 


B12^ 


COKE 


B12^ 


COKE DUST 


B12-6 


WOOD 


B12-7 


FUEL OIL 


BnS 


CITY GAS 



(Inventory Ledger) 

Analysis op Entbibs 

Debit with: 
a. Cost of materials purchased. 
6. Cost of Inbound Freight on materials purchased. 

Credit with: 
Disbursements made during month, established from Stock 
Keepers' requisitions and special reports of materials used, to 
be priced and extended by General Storekeepers' office and 
forwarded to Cost Dept. in shape for distributing to cost 
accounts. 

Balance: 
Represents the cost of materials on hand in each sub account. 

NoU: 
There will be no balance left in the four accounts B14-10, 
B14-11, B14-12, B14-13, as all items charged thereto will be 
immediately credited out to the final accoimt to which they 
are chargeable, being first charged to a Store or Inventory 
Accoimt as a convenience in accounting for all receipts through 
Stores Account, B14. 



B16\ 



STOCK ADJUSTBfENT 

(Inventory Ledger) 



Delnt or Credit with: 
Such adjustments as are caused by overruns and shortages of 
raw materials, process and finished products. 

Balance: 
Will be closed out to Profit and Loss at closing periods. 



B16b billet price ADJUSTliENT 

(Inventory Ledger) 

Ddrit with: 
Stock Preparing Expense and credit as outlined imder heading 
" Stock Preparing Expense " Accoimt, P70 to P710. 



X20 to X216 LABORATORY EXPENSE 

(Expense Ledger) 

DOriiwiih: 
All charges for Pay Roll and other Expense. 

CredU with: 
Proper proportion of Laboratory Expense chargeable to various 
other Expense Accounts. 

Balance: 
This account will close out at end of each month. 

NoU: 

The distribution of this expense will be based upon the service 
rendered the various Operating Depts. and other accounts, and 
the detail distribution sheets should show separately the chai^;^^ 
for Chemical, Metallurgical, Phjrsical Testing and Open-Hearth 
Chemical Laboratories. 

X30 to X320 PAY, COST AND ACCOUNTING EXPENSE 

(Expense Ledger) 

DMt with: 
All charges for clerical and other Office Expenses in connection 
with the Pay Roll and Cost Keeping. 

Credit wUh: 
Proper proportion of charges to various other Expense Ac- 
counts. 

Balance: 
This accoimt will close out at end of each month. 

NoU: 
The distribution of this expense will be based upon the service 
rendered the various Operating Depts. and other accounts as 
near as it can be established, and may be covered by per- 
centage rates varied as occasion may require. 

X40 to X484 GENERAL PLANT EXPENSE 

(Expense Ledger) 

DfbitwUh: 
All charges for Salaries, Pay Roll and other Expenses that are 
not charged to Departments. 

Credit with: 
Proper proportion of charges to various other Expense Ac- 
counts. 

Balance: 
This accoimt will close out at end of each month. 

NoU: 
The distribution of this expense to other Expense Accounts, 
will be in proportion to the service rendered, as near as it can 
be determined; certain items at times can be charged directly 
to specific Operating Expense Accounts, the balance may be 
distributed by percentage ratios varied as occasion may re- 
quire. 

X60 to X6U GENERAL STORE HOUSE EXPENSE 

(Expense Ledger) 
DetyUwUh: 

All charges for Salaries, Pay Roll and other Expenses. 
Credit with: 

Proper proportion of charges to* various other Expense Ac- 

coimts. 
Balance: 

This account will close out at the end of each month. 
NoU: 

The distribution of this expense will be prorated to the other 

expense accounts in proportion to the value of materials, etc., 

issued to each during the month. 



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MODERN ACCOUNTING SYSTEMS FOR STEEL WORKS 



161 



Acer. 
Symbol 



Account 



P60 to P68 WAREHOUSE EXPENSE 

(Expense Ledger) 
Analysis of Entries 

Ddfit with: 

All charges for Pay Roll and other Expenses. 

Credit with: 

Proper proportions of charges to various Cost of Sales Ac- 
counts. 

Balance: 

This account will close out each month. 

Note: 

The basis for distribution of this expense will be in proportion 
to service rendered for storing and shipping steel, the general 
items being prorated in proportion to the direct distribution 
and charged to the proper cost of sales accounts H5 to H12. 

P70 to P710 STOCK PREPARING EXPENSE 

(Expense Ledger) 

DehU with: 

AU charges for Pay Roll and other Expenses. 
Credit with: 

Charges to Billet Price Adjustment Accoimt. 

Balance: 
This account will close out each month. 

Note: 

As this expense is practically an addition to the cost price of 
billets, it will be covered by adding arbitrary amounts per ton 
to all billet prices, establishing different arbitrary prices for 
various kinds of billets as past experience indicates to be 
proper. A sub account Billet Price Adjustment will be kept 
in the Inventory Ledger and this account will be charged 
with Stock Preparing Expense and will be credited with the 
amounts established through the use of the arbitrary prices 
per ton that have been added to the cost of billets handled by 
this department during the month. The arbitrary prices used 
will be adjusted from time to time as the balance in Billet 
Price Adjustment Accounts shows need thereof. 

P80 to P812 INDUSTRIAL RAILWAY EXPENSE 
(Expense Ledger) 

DehUwith: 

All charges for Pay Roll, Fuel and other Expenses. 
CredU with: 

Proper proportion of charges to various other Expense Ac- 

coimts. 
Balance: 

This accoimt will close out each month. 
NoU: 

The distribution of this expense will be based upon service 

chargeable to various other expense accounts. 

P90 to P910 ELECTRIC LIGHT AND POWER EXPENSE 

(Expense Ledger) 

DebU with: 
All charges for Pay Roll and other Expenses. 

Credit with: 
Proper proportion of charges to various other Expense Ac- 
counts. 

Balance: 
This account will close out each month. 



Note: 
The distribution of this expense to other Expense Accounts 
will be based upon meter readings for power furnished, and 
service given that cannot be metered will be prorated to ex- 
pense accounts chargeable therewith on a basis furnished by 
Chief Electrician at the end of each month. 



Acer. 
Symbol 



Account 



PllO to P1112 STEAM EXPENSE 

(Expense Ledger) 
Debit with: 
All charges for Pay Roll, Fuel and other Expenses. 

Credit with: 

Proper proportion of charges to various other Expense Ac- 
counts. 

Balance: 
This account will close out each month. 

NoU: 
The distribution of Steam expense will be in proportion to 
steam furnished to various departments, and the basis for 
distribution will be furnished by the Master Mechanic at the 
end of each month. 



P120 to P1226 



CRUCIBLE DEPT. 



(Expense Ledger) 
Debit with: 
All charges for Pay Roll, Productive materials, Fuel and other 
Expenses. 

Credit with: 
Ingots and scrap produced. 

Balance: 
At the end of each month the total cost of Crucible Dept. 
will be charged against the Product turned out during the 
month. As ingots will be credited to Crucible Dept. during 
each month at certain fixed prices determined in advance, 
there will be a debit or credit to Cost Adjustment Accoimt 
covering the difference between this fixed price and the actual 
cost as established at the end of the month. If the debit or 
credit balance becomes abnormal a revision in the fixed price 
will be in order. 

NoU: 
A monthly cost and expense exhibit will be made out covering 
the month's operation of Crucible Dept. 



P140 to P 1420 
PlS0toP1612 
PieO to P1620 
P170 to P1710 
P180 to P1812 
P1820 to P1880 
P190 to P1910 
P200 to P2010 



HAMMERS No8. 1-2 
HAMliERS No8. a-4 
HAMMERS No8. &-6 
16 m. ROLL TRAIN 
10 IN. ROLL TRAIN 
12 m. ROLL TRAIN 
8 m. ROLL TRAIN 
ROLL TRAIN No. 2 MILL 



(Expense Ledger) 
DehU. each account with: 
All charges for Pay Roll, Productive materials, Fuel and other 
expenses. 

Credit each account with: 
Productive stock and scrap produced. 



Digitized by 



Googfe 



162 



BOOKKEEPING AND COST ACCOUNTING 



Bakmce: 
At the end of each month the total cost of each Hammer or Mill 
Dept. will be charged against the product turned out by each 
during the' month. As the product from the departments will 
be credited during a month at certain fixed prices determined 
in advance, there will be a debit or credit to Cost Adjustment 
Account covering the difference between this fixed price and 
the actual cost as set up at end of month. If the balance 
becomes abnormal a revision in the fixed prices used will be 
in order. 

NoU: 
A monthly cost and expense exhibit will be made out covering 
the operations of each Hammer and Mill Dept. 



Acer. 
Symbol 



Account 



Acer. 
Symbol 



Account 



P210 to P2112 ANlXEALmO AND TREATING EXPENSE 

(Expense Ledger) 
Analysis of Entries 
Debit with: 

AH charges for Pay RoU, Fuel and other expense. 
Credit wOk: 
Such portions of this expense as is estabhshed by using the 
arbitrary rates per ton adopted to cover them and charge to 
Cost of Sales Account H5 to H12. 

Balance: 
After charging out to Cost of Sales the amount based upon 
tonnage of shipments, the balance will be debited or credited 
to Cost Adjustment Accoimt. 

Note: 
Some annealing expense will be chargeable to Wire Dept. and 
the balance to Cost of Sales H5. The remainder of the expense 
will be distributed to such division of Cost of Sales Accoimt as 
work was performed for. 

P220 to P226 ROLL TURNING EXPENSE 

(Expense Ledger) 
Debit with: 

All charges for Pay Roll and other expense. 
Credit with: 

Proper proportion of Roll Expense chargeable to various sizes 

of Rolls handled, this amoimt to be charged to the Reserve 

for Rolls Account. 

Balance: 
This account will close out at the end of each month. 

Note: 
The detail of Cost on New Rolls and Repairing and Changing 
Old Rolls will be entered on a card record for each roll. 

P230 to P239 ENGINE ROOM EXPENSE 
(Machine Shop) 
(Expense Ledger) 

Debit with: 
All charges for Pay RoU and other expense. 

Credit with: 

Proper proportion of charges to other expense accounts to 

which power is furnished. 
Balance: 

This accoimt will close out at end of each month. 
Vote; 

The distribution of this expense will be based upon data as 

to power consumed, furnished by Master Mechanic. 



P240 to PMM BIAINTENANCE EXPENSE 

(Expense Ledger) 

DMLwUh: 
All charge for Pay RoU and other Expense. 

Credit with: 
Proper proportion of Maintenance Expense chargeable to other 
expense accounts. 

Balance: 
This account will close out at end of each month. 

Note: 
The detail distribution of Pay Roll, General Stores, etc., charge- 
able to this account will be kept in separate detail for Machine 
Shop, Pattern Shop, Blacksmith Shop, Bricklayers and Pipe 
Fitters, so that proper distribution can be made of this expense 
to the other expense accounts chargeable therewith. 

P290 to P2918 INSPECTING EXPENSE 

(Expense Ledger) 
Debit wUh: 

All charges for Pay Roll and other expense. 
Credit vnth: 

Proper proportion of charges to the various classes of material 

on which inspection was performed. 
Balance: 

This account will close out at end of each month. 
Note: 

The distribution of this expense will be based upon Pay Roll 

reports of time spent by inspectors on the various classes of 

material inspected. 

P300 to P8054 WIRE DEPT. EXPENSE 

(Expense Ledger) 
Debit with: 

All charges for Pay Roll, Productive materials, and other 

expenses. 
Credit with: 

Productive stock and scrap produced. 
Balance: 

At the end of each month this expense will be closed out to 

Process Stock BIO and Finished Stock Bll in accordance with 

the Dept. Inventory and shipment reports. 
Note: 

A monthly cost and expense exhibit will be made out covering 

the month's operations. 

P400 to P4024 OPEN HEARTH DEPT. EXPENSE 

(Expense Ledger) 

DMtvnih: 
All charges for Pay RoU, Productive materials, Fuel and other 
expenses. 

Credit with: 
Ingots produced. 

Balance: 
At the end of each month the total cost of Open Hearth Dept. 
will be charged against the cost of producing ingots B3. Aa 
ingots from the Open Hearth Dept. will be credited thereto 
during a month at certain fixed prices determined in advance 
there will be a debit or credit to Cost Adjustment Account 
covering the difference between this fixed price and the actual 
cost set up at end of month. If the balance becomes abnormal 
a revision in the fixed prices will be in order. 

N(^: 
A monthly cost and expense exhibit will be made out covering 
the month's operations. 



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MODERN ACCOUNTING SYSTEMS FOR STEEL WORKS 



163 



TRIAL BALANCE— BALANCE SHEET— INCOME 
STATEMENT 

The following are typical forms of trial balance, balance sheet 
and income statement for a steel works. The titles of the 
accoimts, and the symbols are ilifferent from those used in the 
foregoing list of accounts. 



Trial Balance as of 

Debits 



Credits 



A1 


Real Estate 


1 

2.000 


00 






A2 


Buildings 


8.000 


00 






A3 


Machinery 


20.000 


00 






A4 


Furniture and Fixtures 


2,000 


00 






A5 


Miscellaneous Tools 


3.000 


00 






B1 


Cash 


1,250 


00 






B2 


Petty Cash 


250 


00 






B3 


Accounts Receivable 


35.000 


00 


' 




B4 


Bills Receivable 


6,500 


00 






B5 


Prepaid Insurance 


260 








B6 


Prepaid Taxes 










B7 


Outside Securities 










B8 


Cash Advances 


1.500 


00 






B9 












BIO 


Branch Accounts Receivable 


2.450 


00 






CI 




12.000 


00 






C2 


Raw Materials 


20,000 


00 






C3 


Work in Process 


25,000 


00 






C4 


Finished Product 


16.000 


00 






C5 


Supplies 


2.000 


00 






Dl 


Capital Stock 






100.000 


00 


D2 


Surplus 






15,000 


00 


£1 


Accounts Payable 






25,500 


00 


E2 


Accrued Taxes 






450 


00 


E3 


Accrued Pay Roll 






1,500 


00 


E4 


Income Tax Deductions 










E5 












Fl 


Reserve for Depreciation 






5,000 


00 


F2 Reserve for Bad and Doubtful Ac- | 












counts 






• 1,500 


00 


Gl 


Sales of Factory Product 






135,000 


00 


G2 


Sales of Purchased Goods 






75,000 


00 


G3 












G6 


Discount on Purchases 






47 


00 


G7 


Interest Received 






35 


00 


G8 


Sales to Branches (Consigned 












Goods) 






7,500 


00 


HI 


Cost of Sales, Factory Product 


122.000 


00 






H2 


Cost of Sales. Purchased Goods 


71.000 


00 






H6 


Claim Adjustment 


900 


00 






H8 


Cost of Sales, by Branches (Con- 












signed Goods) 


7,250 


00 






Jl 


Discount on Sales 










J2 


Sales Dept. Expense 


3.410 


00 






J3 


Claims and Allowances 


3,701 


00 






J4 


Freight, Prepaid and Allowed 


500 


00 






K1 


Profit and Loss 
Total 


561 


00 








366,532 


00 


366,532 


00 



Balance Sheet as of 



Assets: 

Fixed Assets: 
Real Estate and Buildings 
Machinery, Tools, etc. 

Total 
Less: Reserve for Depreciation 

Total Fixed Assets: 



I 

10,000 
25,000 


00 
00 


30,000 


35,000 
5,000 


00 
00 





Balance Sheet as of— Continued 






Brought Forward 
Current Assets: 

Cash 
Accounts Receivable 
Bills Receivable 


35,000 00 
6,500 00 


1,500 

40,000 

260 
1,500 


00 

00 

00 
00 


30,000 

43.260 

75.000 

2,450 


00 


Total Receivables 
Less: Reserve for Bad Ac- 
counts 


41,500 00 
1,500 00 




Prepaid Insurance 
Cash Advances 






ToUl Current Assets: 
Inventory Assets 
Miscellaneous Assets 






00 
00 
00 


Total Assets 


150,710 


00 


Liabilities: 

Capital Stock 

Surplus 

Current Liabilities: 
Accounts Payable 
Accrued Taxes 




27,000 
450 


00 
00 


100.000 
15,000 

27.450 
8,260 


00 
00 


Total Current Liabilities 
Profit and Loss 


1 




OO 
00 


Total Liabilities 


150,710 


00 



Income Statement for 




Ending 








Gross Sales to Outsiders: 














Mill Product 


I35,000i00 










Purchased Goods 


75,000 


00 


210,000 


00 






Total Gross Sales to Outsiders 








Gross Sales to Branches: 














Mill Product 


5.000 


00 










Purchased Goods 


2,500 


00 


7.500 


00 


217 500 




Total Gross Sales 










00 


Less: Allowances: 














Returned Goods 


1,500 


00 










Price Adjustment 


1,000 


00 










Def. Mat!, and Work 


500 


00 










Business Policy 


500 


00 










Poor Service 


201 


00 






3,701 


00 


Total Net Sales 








213,799 


00 


Cost of Sales: 














Factory Product 


122,000 


00 










Purchased Goods 


71,000 


00 










Sales to Branches 


7.250 


00 










Claim Ajustments 


900 


00 






201,150 


00 


Gross Profit on Sales % 








12.649 


00 


Deduct: Selling Expenses 










3,910 


00 


Net Operating Profit % 






8,739 


00 


Deduct: Discount on Sales 














Charges to Profit and TiOss 


561 


00 






561 


00 


Total less Deductions 






8,178 


00 


Add: Discounts on Purchases 


47 


oo 










Interest Received 


35 00 










Credits to Profit and Loss* 








82 


00 


Net Profit for Period 










8,260 


00 



00 



* These items are debits and credits to Profit and Loss that have not been 
charged or credited to manufacturing accounts. They usually represent 
adjiutments affecting matters not directly connected with operations. 



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164 



BOOKKEEPING AND COST ACCOUNTING 



FORMS USED BY MR. WALTON IN STEEL WORKS AND OTHER ESTABLISHMENTS 

Form Wl. — Schedulb op Parts and Operations 

This sheet is used in developing a routing and scheduling system in a heavy hardware and tool factory where the first 
requisite is to obtain a systematic record of what is manufactured, arranged in Bill of Material form and containing neces- 
sary data as to operations in each department and their usual sequence. 



{Loom Lm^T Binder Sheet 
StxeUxtUn,) 














1 _„. 










rk A «nr^«.^^'m. 


1 
















^mSde ARTICLE 

UNIT OF QUANTITY SHEET OF 




























































Nnmbcr 

of 

PlecM 


NAME OF PART 


MATERIAL USED 


BouBht 
Outalde 
and Price 


LIST OF OPERATIONS 


Ooiintlty 
to Order 


REMARKS AND 
FINISHED WEIGHT 


Kind 


8iM»d 


OPERATION 


"K?A" 


""sm^ 


150 Ituea, « Mr tnoh) 
















































-U 


1 — 








-J 





















Form W2. — Requisition Card (5 X3 in.) 



y^' P«. Order No. 


Tbla la Req. No. 


Subject X 








Received 


Origin 
"DEPT. 12 


laaued to Dept. 13 


DM« 






Needed 


Ordered in above 


»— . 


DM. 


b^ 


Wanted ( » lines, s per inch ) 


Remarka S Unea 






Forwarded 







The other side of this card has columns and ruling (5 per 
inch) and headings as below: 



Date Hurried 

























Form W4. — General Store Room Card 
For rough and unfinished parts carried in store rooms. 



RECORD OF UNFINISHED STORES 


N.me IS:^: 


Mafl 


Bin 
No. 


Symbol Assembly SS*** 


Used on 










Carry iRepeIra Pea. 
For ■ 


When atock to 
Down to Pea. 


No. per Unit 










ORDERS 




^ RECEIPTS AND DELIVERIES | 


Si^ 


P.O. 


%t 


ABMuat 
OHmd 


Wb«B 


obOHv 


Dito 


P.O. 


8.0. 


Aort. 

RMd 


Aat. 


Bkteat 
wBttd 




(uiin 


f9.*pt 


U,c» 




{Size5 


Sin.) 














{EeverseqfCard) 


ORDERS 


RECEIPTS AND DELIVERIES 


^ 'ii' 


8.0. 


AmoBBt 
OHmd 




B>LDiM 
oaOriw 


Halt 


P.O. 

Ma 


B.a 


Ami. 


Arrt. 


«IU«i 


Urifn 


m,ip* 


rinch 



















Form W3.— REomsrnoN for Supplies (5 x3 in.) 



yta.«iiiniAPoo 


Stmcture No. 


PfeNo. >v 


Ma.P<«. 


Origin 
DEPT. 12 


For details aae 
B/M 


Kind 


M.....r. '^^ 




R.f 


rkn 


Money Value each 

Mil 


"" -Df 




Remarka | 






Date 
From 
12 


Date 
To 

73 


Date 





Form W5.— In and Out Stock Card 
Designed to hang in front of bin. 



fiSttem v«<n.) 



Part No. 



QiBrcuB eyelet) 



Name 



Location 



Bldg. 



Floor 



Condition 



Unit ofMcaamre 



Minimum 



Date 




Date 



Inci. Column 



Issued 



kMUlit g» any n \IU g» 



Balance 



emitituedoi 



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MODERN ACCOUNTING SYSTEMS FOR STEEL WORJKS 



165 



Form W6. — ^Tihe Study Blank for General Machine- 
shop Use 



iai*€€x^in.) 



TIME STUDY 



N—e pf riirt 



Sybol 



Opcmtion 



Group 



Type of Machfax 



{aiinea^ 9 per inch) 



No. Pct. Machteil 



GMigNo. 



Dcpt. 



Kind of Steel 



(99 lines, 9 per inch) 



B>-d|r^ I ct iM^iiKaarii!^ 



Tof I Time in Mtoot— 



Total Gang Hours _ 



{to lines) 



Name of Opetator or Leader 



Time Stody No. 



Approv ed by 



Made by 



Effy 



Schedule No. 



Form W7. — Combination Clock and Time Card 
Individual job tickets are preferable to these one-day time 
cards, but for some classes of work this card is well arranged. 



(SUe5Xx3Xl«.) DAILYTIMECARD 



-Name 



Dept» 



_Tlme Frooc 



Week Ending 



Ord€tr No. Name Pattern No. Operation Hours Pieces Ajnount 



{S Ones ^ per in>h) 



c 



Total 



T 



1 r 



The reverse of the card with columns for the clock-stamp 
record is as below. 



1 


Time 


Hours 


Rate 


Amount 




Rcsttlar 






» 




Overtime 





















rv lines) 1 -^ — r 


1 -n 


Mominff 


Aftemooa 


Overtime 






in 


Out 


In 


Out 


In 


Out 

















































1 ^ 




(7 lines A per inch) 














aK. 











Form WS.—Job Time Ticket (Size 5x3 in.) 
Tickets of the same size and style, printed on different- 
colored paper, are used for different departments. The 
printing varies with the kind of work done. 



y/cONTRACT NO. 


STRUCTURE NO. 


PC. NO. >v 


MONEY VALUE 

1 1 1 


DEPT. 

8 


MACHINE 


OPERATION 


HOURS 


QUARTERS 


DATE 


MAN NO. 


REMARKS (« lints, s per inch) 





^ Samples of the printing on some other cards are shown 
below. These are group cards, used when more than one 
man works on a single job. 



CHARGE NO. 



OPERATION 



No. of Pieces No. Pes. Fin< 
In Lot ished this day 



DEPT. 
27 



Weight of 
Pos. Finished 



MACHINE 
NO. 



MONEY VALUE 



HOURS 



OUARFERS 



REMARKS (5 lines) 




The reverse of this card is headed as below: 



Man No. 


N-« 


Time lot 
This Card 


rotal 
lor 


o-ir 






Hrs. 


Ors. 


Hrs. 


Qrs. 




Value 


Smhh 


















Helpers 



















Department No. 29 has the same card except that the 
word ** Leaders " is printed instead of " Smith." Dept. 
No. 47, Sheet Iron Dept., is similar except that the third line 
is as follows: 



HOLES IN EACK 
PIECE 


TOTAL HOLES 
PUNCHED 


SHAPE 


HOURS 


QUARTERS 



and on the reverse side "Punchers" is used instead of 
" Leaders." An individual time and job card for the same 
department has printing as follows: 



Form W9.— Job Time Ticket 



/ Charge No. 


2&I 




1-12-01 \ 


Man No. 

sold 


Name 
J. Darls 


Money Valua 


Operation 

Drilling 


Dept. 

47 


Machine No. 


Hours 

7 


Quarters 

1 




BolM 
AU 


BlMOf BldM 

1* 


Work 


Rate 












Time O.K. 




Tout 
TtaMteDnj 


Hours 

10 


Qusrters 




D-S- A.. Sheet Iron Dept. | 



Particular attention is called to the value of the information that is obtained from Form W9 with a minimum of clerical 
work. It not only credits the workman with 7 J hours time and charges order No. 25.1 with the same amount of time, but 
it shows that in that time on machine £26 451 holes 1 inch diameter were drilled in metal J inch thick. If this latter 
statement is posted on a card headed Drilling 1-inch Holes it forms a basis for estimating the cost of future work in which 
the drilling of holes is an important element. A drawer containing cards for each kind of operation that can be done on each 
class of tool is a most valuable aid to the estimator in making predeterminations of costs of any machine or operation. 



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166 



BOOKKEEPING AND COST ACCOUNTING 
Form WIO. — ^Pat-off Slip 



g CASHIER 9lMM p«y 



PAY OFF SLIP 

191 



Worked in I>«|»t... 



CU Wages dtte oa last pay psriod ending.. 
< Wagea due this pay period ending 

3 



Net amount due 



_ . Received payment for all wages due lo date 



Wlmess 

NOT NEGOTIABLE 





Form WU.- 


-Typical Premium Ticket 


i8U€ i X in,) 

PREMIUM WORK 


Operation 


Premium 
Limit 


Order No. 


Name of Part 


Symbol 


Number Pieces Finished 


Def. 
Pes. 


SUMMARY 


Date 


Pcs. 


HO.,. 


Date 


Pes. 


Hours 


(/* 


Uneti 


9eri»o. 


i} 








Premium Time 






















































Time Saved 




















Bonus Time 
















Rate 


















Bonus Amt. 




































Figured 


Checked 
















Totals 














Credited 


















Key Number 


Name 


O.ILI 


or Pieces Finished 


NOTE:- All Records on these tlcke 


J, Inspector 


left at 
done 


machia 
until It 1 


lewhen 
s f InUh 


»work 
sd. 


Isbeini 


r Timekeeper 



The reverse side of the card has the following: 

PREMIUM SYSTEM REGULATIONS 

1. Each employee shall be guaranteed his regular day's wages 
for all time at work. 

2. A limit once set and worked upon shall not be reduced 
except through the introduction of new methods in process of 
manufacture. 

3. No limit shall be placed upon the amount of premium an 
employee may earn and receive; large premium earnings on the 
prescribed limits shall be desired. 

4. All premiums earned shall be paid on regular pay days of 
the Company. 

5. This card is for use of the men during the progress of a 
job, and shall be left at the Operator's Machine. Time should 



be checked daily by workman, and errors rectified with the 
Timekeeper and Foreman before cards are forwarded to the 
Office. No claim for errors in time can be allowed after card 
is sent in for payment. 

6. All defective parts must be reported to Foreman imme- 
diately on discovery. Day rate only will be paid on such parts. 

Form W12. — Production Card (see holder, on nesrt page) 



C»rd Na. 


MTS 


Date 


Jnoe 1. 1915 


Part No. 1384 Chopper # 10 Body 




"A" 






Find in 45 




.Plecaa In Track 




Store in 












Issued by 




Job No. 


No. 


NATtmE OF JOB 

Fes. on Oate-f 


OpMaUvVt 
No. 


Plloo 


far 


lOSIO 


4 


Monldinff 








1011 


11 


Orindlnff 


«7» 


la 


500 


lOlS 


11 


BelUnff 


896 


91 


498 


««7» 


7 


Borinff 


754 


17. 


490 


2480 


7 


Tnndnflr Out Side 


698 


8.5 


496 


9S 


7 


Drill for CI. Screw 


088 


8.5 


496 






Size c^r card AX X 9 in. 












aiUntn^tperineh 




























Condition 








Transferred from Card No. 




IlMpOCt. 










.1 



Jeb He. 
Last 


Jeb Be. 

IThare 

Defeedve 


1 


1 
1 


1 

1 


i 

i 


REMARKS 
and 


Loss { 


OS... 




TeUl 


1042 


1018 


/ 








Belted Out 


8 






2479 


8479 




• 






MlMedBorinc 


2 






Bcu 


k of Card 


fx 


iA 


'» 




to linea, s^cr inch 
















_ 













Form W13. — Shop Order Card. Suitable for machine shops. 



^iSUe S\ X 7 fn.) 



Order No. 



Date Issued 



Date Wanted 



Make 



_Pieces, ForDept.. 



Symbol_ 



Operation 



Plane 



Shape 



No. Pleoaa 
Finished 



No. Pieces 
Defectlre 



by 



13 Addtttonalhinea, i per tn^ with pHntfi I aid* heads. 
Bore, Turn, Fijice, mUt ScrtteMaeh., Drill Spindle, 



J'oUth, Erect 



or Fit, andfo\ r blank tpaeei . 



Key No. 



THIS TICKET MUST BE CAREFULLY PRESERVED AND 
SENT TO COST DtPT. WHEN WORK IS FINISHED. 



{Fteverae Side) ^, ^ „ 

Pieces Delivered 


To Store Room 


To Erecting Floor 


Date 


No. Pea. 




Date 


No. Pes. 
















1 T 1 r 1 -Tzzrz 

f Hn«s i per <»c*. 8M tfa MonJc «paoe of ftoltom 



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MODERN ACCOUNTING SYSTEMS FOR STEEL WORKS 



167 



Form W15. — Operation and Part Cost Card 

Enabling any combination of costs to be obtained by 
gathering together the required cards covering a particular 
assembly, a complete. engine or machine, etc. 

Where interchangeable parts are used on different sizes 
of engines or machines it saves duplication of cost cards. 
An entire cost system has been introduced successfully 
on this card basis in plants making hundreds of different 
types and sizes of engines, pumps, etc. (D, day work; 
P, piece work.) 



{SU€ 8^x7tn. Printed on both aides) 
Part Symbol 


Used on Wt 


Eiich Mflf 








Operation 








{Five more 1] 






louble columnH 


«S3. 


L-?i 


No. 
Made 


g?X 


Made Each 


M^iSV 


m 


D 
















P 
















D 


{Repea tfor « ifmea, tipo linet 


for totala, tht 


» reptdt 1 1 


P 


mortt 


met an 


4 two i(ne»foi 


total*) 








_ 1 




1 • 









Form W16. — Comparative Record of Costs op Opera- 
tions AND Parts at Different Dates 



Symbol Bi«« Pari A | Wt. A^IIm. Mfl Cast Iron ] 


Date 
Order No. 


Mork 


1/.5/15 


4/11/lfi 














112« 


2891 














Rate 


M-tS-. ti 


»il3.;^rh 


& 


Coft 


y^ite. 


^A 


fe-K 


^X 


fa 


-tS. 


fei 


tf^lte 


T-'-f;:: 




























' 


100 .02 


100 |.02 






















•>-"?:»; 




Too' 


































.003 


100 


.993 


























vrni ^•^'• 




9S ;.041 






























Mm p^^ 




100 


.035 


























^'-m 


— 


















— 


— 








1 


97 .03 


98 


.025 






















Key D.W. 
Seat P.M. 




1 
















— 
















'.»; ,a:« 


98 


L.>«i 
























{t Un«$ 


[Size 9*4 X *H in^ Printed on both tUUt 
for i other operation*. D. H*., Day Work. P. IF., 


Piece Work.) 
































: 1 


Toul Coat 




97 


iwi 


98 


.1143 



























Fig. 16. — Walton's Card Holder. 
(See description on page 151.) 

Form W14.-— Pattern Cost Card 
(Issued by Supt. of Pattern Shop.) 




Form W17.— Request Sent to Foreman 
To explain why costs of operations have increased. 



{Size tM«Hin,) COMPARATIVE LABOR REPORT No 
Dmte 19 Symbol 

Part 




( 


Operation 1 


Mr. 






Ple«M note Labor aa gtven below. 




Date 


%%'.' 


ffZ 


Name of Workman | JiHi*^ 


Tl.e 
TakcB 


Rate 


Sill «^"»»- 








1 






1 



(3 Une$, H in. spacing) 



Remarks 



Previoua Recorda abow 

(3lUe$) I 



(/ in\ apace) 



OortPwt.- 



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168 



BOOKKEEPING AND COST ACCOUNTING 



Form W18. — Material Used from Stock 
Record of structural shapes, bars, etc., in plants where a well-arranged stock yard system is in efiFect. 



{Sue «K X ? in,) 
Req.No. 




MATERIAL USED FROM STOCK 


















Dniwinir No. 




Shop BiU ] 


P«g«L 




Sketch N< 




Date _1_9____ OrderN 


0. 








MATERIAL WANTED 


Cut From || Refd to Stocii 


Weight 

of 

Material Used 


Prioe 


Amount 


Item 
No. 


No. 
Pieces 


Shape 


Section 


Length 


No. 
Pieces 


Length II No. 


Length 


Ft. 


In. 


Ft. 


In. II Pieces 


Ft. 


In. 






(mines, % in.spactng) 


















_ 


1 


— 










1 
















II ! 




__ 


. 











. 





Form W19. — Inventory Ticket 

This ticket reduced the work of taking and recording an accounted for. The details will of courses vary a the class 
inventory. The tickets are numbered consecutively on a of material varies, 
numbering machine, so that every ticket issued may be 



No. 17 










INVENTORY TICKET 




Symbol 






No. Pieces 




Bin No. Room No. Dei 


?t. 


Drawing No. 










Rough 




KIND OF MATERIAL 


Full Desc. of Part 






FinUbed 




Steel 


1! gastmgs__ 

|jln» 




U linest H in. spcer) 


MMb. 


SK?£2!2!Lli«. 


O.H.« 
MUd 


(stMl 








RolW 


1, Iron 












KS' 


1 YeUov 
1 BrMi 




PART OF MACHINES 


Weight Each 




Tin 
Pl«to 




Si. 


ISS. 


Hull'r 


«, 




Total Weight 




Fire 




BroDM 








■Feed. 


a.,. 




Quantity 




Suva. 
HhapM 


1 Mi«c.Msfl9 

Iron PiM 




Ki. 




1 W«iron 




Size 




BbMt 




iifUt 

Tub* 




^st. 




«,u 








BUek 
Sbwt 




Dwp 




BoUcr i 









» 




SSit^-- 




K«>lUd 
BnM 




Ondtf 




oa 


G 








Wjou^bt 








Wind Sep. 




Ei» 


E 






ji*ji^;(oiT,ki»d) 


StMk. HbIL 






r 






UmUr (eiT* Bn4c aad kind) 


(QlnpABc) 


Counted by 


(i lines) 




Count Checked by 








V»e Separate Sheets for Finished, Partly Finished, and Rough Parts | 



Form W20. — Requisition for Small Tools 



(SizesHx^Hin,) REQUISITION ON SMALL TOOL DEPT. FOR TOOLS OR EXCHANGE 

Note: Foreman must siam requisition and see that proper description is ffiven of tools required . 


Sec. 


Dept. No. 


Time Ch'lK 


Name 


Page No. ToolBook 


(Are Tool Checks Required Yea. or No ) 












Files. 


Drills 


Taps 


Dies 


Miscellaneous , Bin 5<>. 


Qiua. Lenctb 




Cut 


BlB 


Qno. 


Bbc jShuk 


Bin 


Quid. | Btee Pit«h 


Din 


Qumn. 


Sli« ' PHoh 1 biyla 


ran 










1 




1 1 






1 








I 1 












1 \ ! 1 












(«z 


fnM.iperfti 


eh) 












1 






1 




1 




Bnub 


Lock 


Oil 


File Handles 


Hack Sawa 


Raw Hide Mallets 


Chisels 


Flat 


Cape 


Gouge 


Diamond j 


Urp 


Medium > Smul 


8- 


10' 


12* 


No.1 


No.t 


»•.» 


If 0.4 


No. 6 


Ant. 


8lM 


Ant. 


SlM 


Ant. 


bb« 


Ant. 


«•■ 


Qaaa. 














































BlaNo. 














































i Pi 


ite 




F«i*» 


nan 






1 


FOR 


EMAl 


^•s 


C( 


OFi 


r. To be returned by Small Tool Dept. 





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MODERN ACCOUNTING SYSTEMS FOR STEEL WORKS 



169 



Form W21.— Tool and Pattern Requisition 

This blank has been introduced in many shops when it and making new equipment, which if left to the foremen 
was necessary to use some judgment in authorizing repairs and superintendents often caused needless expenditure. 



Factory 
To 
From 


i9lzeS^x7tn.i 


TOOL AND PATTERN REQUISITION 
DeDt. Date 
Dept. Account to be charged 


Order No. 


191 




Rcpair 


(sUn€»,X in apace) 








EacCost 


Labor 


Mafl 


Total 


Mdie U line*) 





Reqolrvd for ub« on 



Preaent Coat of Work oa oae piece 
Aprox. ploocs made per month 



^Expected saving by nae of ncw_ 
Aprox. monthly saving If new 



_per piccc_ 
is made 



Eatlmated Cost of Tool -Labor 



Mat'l 



(i Une») 



S Factory 
Manager 
is over 91t.M 



Shop 



Approval required if labor estimated \ Supt. 
is over 92.M and up to $lt.M 



Foreman or other person originating 
this raquisltioa 



NOTE:-After proper approval of this reqnbition it mvst be sent to Factory Accountant for entry and assignment of Order No. 
No work must be done on this requisition nntii receipt by Shop of order authorising it from Accounting Department. 



{The reverse aide qfthU blank is <u belote,) 



COST OF TmS JOB 



Pay Period and Item 



Labor 



1 



Summary 



{90 lines, m Pfrinch) 



Form W22. — Suggestion Card 

This form was successfully used in many shops in 83r8tem- (The other side of this sheet is blue crossnsection or " qua- 

atically caring for suggested modifications in design when drille " ruling, 4 lines to the inch.) 
development work was under way. 



{Size 9Hx7in., ruled lines H in. space) 



SUGGESTED MODIFICATION IN DESIGN 



To Engineering Pept.. 



From Dcpt., 



Design 
Materia] 
Req'd Finish) 



We would euggeat the following changea in the M aterial \ for Sy mbol 



Name* of Part 



Used on 



The changes proposed ere aa followi; 



(S lines, 4 per inch) 



The advantages to be gained by the change are 



{8 lines, * per inch) 



We have on hand at thU date P 


eces of this part 







The value of these parts on hand Is 


Scrap value will be 


Loss if present stock becomes obsolete 


Date 191 


Change approved | 




Department 


Supt. of Dept. 






BtU fint Hotptod >a4 uppnnA br tbc ChUf EncfaiMr. 







SCHEDULE OF ACCOUNTS OF ANOTHER STEELWORKS desigiied for the Pennsylvania Steel Works in 1905. The 
The author is indebted to Mr. Gershom Smith for a copy original schedule, of which this is a revision, was designed 
of the schedule of accounts (shown on page 170) which he by him in 1902. 



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170 



MODERN ACCOUNTING SYSTEMS FOR STEEL WORKS 



• •- «» 2 ;: 2 22 5 2*: 22g s as ^^ SS 



5 5 



$ g 




8 I 

a ^ 



111 

Q S 



s s 



i 1 1 
1 1 g 



55 

55 ggg cqS S 



^ .1 a 



§3 

^5- 



« 



-I 



I 



s § s 

III 



a 

IH 



s I J 

1 1 1^ 



9 9 as 
s I _s s 

I |i !i I 

i II |g g 

a SB 5S S 




s 

1 ^1 

111 



1 



o 



g 



ft 
ft 



1 a 



I 111 

I! 







illlpil 

I^JI III 



1^ 



g 
1 

CO 






c3goe-g § s 



Q 



f ill 3 a 

. See * a 

g 6^8 3 8 



^ 5 lis? 1 

fl • £33 S fl flS BSi3'^ 

isiiiiiiaij| 



S CO 

8 ^ 



a* 
IS 



.0(3 




d d 

-ill 



t s s g ^1 

yi I ii I: ^ 

ooSoS 25 g5 Sg 2 










1l 



« ll 




• oSo § ® 5 5 S 
SaSsSstfSS^ 3d3 



!lli^>^- 






Id 



I 

immu mm t ll 




il» 1 1 



.J 

s S«) • 
a .^? 

S 55P5d 

i|8i« 



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CHAPTER XVII 



FOUITORY COSTS— COST OF COAL 



COST FINDING IN AN IRON FOUNDRY 

A brief statement of some of the difRculties met with in 
obtaining foundry costs will be found on page 71. 

The results of one month's operation of a certain foundry are 
given in the tables below. (See page 173.) 

The system shown in Mr. Walton's tables may be quite 
satisfactory for some foimdries, where the castings are made 
not for sale as castings, but to supply the machine depart- 
ments of a large factory, where the sizes are generally small 
and the output fairly uniform from month to month, where the 
daily wages do not greatly vary, and where no crane service, 
heavy molding machines, or pit molding are needed. The 
final figure, $46.58 per ton, is a sufficiently close approxima- 
tion to "factory cost," at which the castings are to be charged 
to the manufacturing departments in which they are used, or 
valued in the inventory. Monthly statistical sheets, showing 
the monthly variation in the several expense items, furnish a 
check on undue advances in these items and indicate where 
economies may possibly be effected. 

For a jobbing foundry, however, making both large and 
small castings, using high-priced skilled labor on some 
products and low-priced labor on others, where some castings 
require crane service, pit molding, power for chipping and 
cleaning, and others do not, and both large and small castings 
are sold at a small margin of profit, under intense compe- 
tition, the average cost, $46.58, is an unsafe figure to rely on 
in fixing selling prices or in making inventory valuations. 

In such a foundry the first thing to be done in obtaining 
costs is to make a strict separation between the cost of 



melted metal in the ladle and the cost of making this metal 
into castings ready for delivery. The latter cost is to be 
subdivided into direct labor and indirect, or burden, costs, 
and each of these is to be classified according to the different 
kii^ds and sizes of castings and the conditions under which 
they are made. 

The variable conditions are: 

Heavy, light and medium castings. 

Plain and cored castings; dry sand and green sand. 

Bench, floor, pit, and machine molding. 

Cleaning by hand or by machine. 

Flasks, wood or metal, snap flasks. Depreciation of flasks. 

Crane, buggy or hand transport. 

Labor, highly skilled or ordinary; daj' work or piece work. 

Number of flasks put up by a man per day; or tons made 
per man per day. 

Risk of spoiled or rejected castings. 

Supervision and inspection on different kinds of casthigs. 

The direct-labor cost of any casting or group of castings 
may be determined in the usual way by time and job tickets 
for each production order, but the proper allocation of the 
total monthly or yearly burden to the several classes of 
castings will require careful consideration of aU the above 
variable conditions together with time studies of certain 
representative castings or groups of castings. 

Making some assumptions as to the cost of melting we may 
make a restatement of Mr. Walton's figures in such a form as 
to show separately the melting cost, and the cost for direct 
labor, indirect labor and other expenses outside of the melting 
department, as foUows: 





Monthly Cost. 


Cost peb Ton of Castxsgs | 


Melting 


Other than 
Melting 


Total 


Melting 


Other than 
Melting 


total 


General factory expense 

Repairs, maintenance and supplies 

Cupola labor 

Direct labor, molding 

core-making 
Productive labor charged to burden 

Total of the above items 
Metal, fuel and flux 

Net cost 366.6 tons good castings 


498.81 
391.13 
291.83 

395^63 


1723.84 
394.79 

4591.20 
1399.03 
1875.63 


. 2222.65 
785.92 
291.83 

1 5990.23 

2271.26 


1.36 

1.07 

.80 

1.08 


4.70 
1.06 

12.52 
3.81 
5.12 


6.06 

2.15 

.60 

} 16.33 

6.20 


1577.40 
5512.15 


9984.49 


11.561.89 
5,512.15 


4.31 
15.04 


27.23 


31.54 
15.04 


7089.55 


9984.49 


17.074.04 


19.35 


27.23 


46.58 



The total burden outside of the melting department is 
$3994.26. Dividmg by the direct labor, $5990, gives 66.7 
per cent as the average percentage of burden to direct labor. 

Assuming 25 da3rs per month, 10 hours per day, or 250 hours 
per month, and dividing this into $5990 gives $23.96, say $24 per 
hour, or the wages of 80 men at an average of 30 cents per hour. 

80x250=20,000 man-hours per month. Dividing this 
into the burden $3994, say $4000, gives an average burden 
rate of 20 cents per man-hour. 



The product was 366.6 net tons, or 733,200 pounds. Divid- 
ing this into $3994 gives 0.545 cents per pound, or $10.90 
per ton. 

The average total cost per ton may thus be stated as follows : 



Metal, fuel and flux 
Burden, melting department 
Direct labor, molding, casting, etc. 
Burden, other than meltins 



t19.35 



27.23 
$46.56 



171 



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172 



BOOKKEEPING AND COST ACCOUNTING 



If the castings were divided into classes according to the con- 
ditions under which they were made, we might find that 
both the direct labor and the burden might differ in some 
cases as much as from 50 per cent below to 100 per cent above 
the average, so that a revised statement of costs might read 
as foUows: 

Cost of Different Classes of Castings, Per Ton 





Minimum 


Maximum 


Average 


Melting Cost 
Direct Labor 
Burden 


$19.35 
8.17 
5.45 


$19.35 
32.66 
21.80 


$19.35 
16.33 
10.90 


Total 
Cost per Pound, Cents 
Burden per Pound, Cents 
Burden per man-hour, Cents 
Burden Per Cent of Direct Labor 


$32.97 

1.69 

0.27 

10 

33.3% 


$73.81 
3.69 
1.09 
10 

133% 


$46.58 
2.33 
0.545 
20 

66.7% 



An ideal cost sj'stem for a foundry is one in which the 
costs are predetermined as far as possible, by having standard 
piece work, or task and bonus, rates for all direct labor, and 
a standard schedule of burdens for all the different classes of 
castings. Burden account should be charged with all the 
monthly expenses, including reserve for depreciation, interest 
on investment, taxes, insurance, repairs, supervision and other 
indirect labor, etc., and credited with the sum of all the 
standard burdens which have been charged to the cost of 
finished product. The balance of burden accoimt is unearned 
or over-earned burden, which at the end of the year is to be 
charged or credited, as the case may be, to Profit and Loss. 

COST-FINDING IN BRASS, BRONZE, AND ALUMinuM 
FOUNDRIES ♦ 

Method of Departmental Divisions 

The natural division into which the Manufacturing Expense 
of the jobbing brass foundry falls are: Melting, molding, 
coremaking, cleaning, inspection, shipping, pattern making, 
machining, general. They are subsidiary departments of the 
foundry. The inspection and shipping costs may be com- 
bined in summarizing the departmental costs, for easy com- 
parison from month to month. This plan of collecting the 
cost data makes possible the detection of variations in the 
costs of each department. 

The following items make up the costs of casting: 

Metals (A) 

Department 

or Class No. , 

Al. Purchased metals: such as copper, tin, lead, zinc, phos- 
phor, purchased scrap. 

A2. Foundry scrap, resulting from heads, gates, pickings, 
and defective castings. 

Manufacturing Expense (B) 
Bl. Melting: labor (BIO), supplies (Bll), overhead (B12). 
B2. Molding: labor (B20), supplies (B21), overhead (B22). 
B3. Coremaking: labor (B30), supplies (B31), overhead 
(B32). 

* Condensed from Service Bureau BuUetin No. 4, 1917, issued by 
the Committee on Foundry Methods of the National Founders' 
Association. 



Department 
or Claw No. 

B4. Cleaning: labor (B40), supplies (B41), overhead (B42). 
B5. Inspection: labor (B50), supplies (B51), overhead 

(B52). 
B6. Shipping: labor (B60), supplies (B61), overhead (B62). 
B7. Pattern Making: labor (B70), supplies (B71), overhead 

(B72). 
B8. Machining: labor (B80), supplies (B81), overhead 

(B82). 
B9. General: labor (B90), supplies (B91), overhead (392). 

Buildings and Equipment (C) 
CI. Buildings: labor (CIO), supplies (Cll), overhead (€12), 
C2. Equipment: labor (C20), supplies (C21), overhead 
(C22). 

Selling Expense (D) 
Selling expense may cover salesmen's salaries, advertising, 
traveling, interest, discounts, outbound freights, etc., as the 
management may decide. Overhead is not charged to Selling 
Expense. 

Metals. Al metals carry their original purchase prices 
until each lot is exhausted; or, until, at the close of any in- 
ventory period it is found advisable to write the prices down. 
A2 metals are readjusted to the prevailing market value of 
metals at each inventory period, monthly or quarterly. 

The most important feature in handling non-ferrous metals 
is the recognition of the loss which occurs in melting. The 
following example illustrates the actual condition : 





Lbs. 


Lbs. 


Metal charged 
Good castizucs made 
Gates, risers, scrap, etc. 
Dross, pickings, etc. 
Loss by difference 


20.000 


IO.O00 
8.000 
I.OOO 
1.000 


Total 

Loss, % of metal charged 
Loss, % of good castings 


20,000 


20.000 

5% 
10% 



The metal lost in melting must be carried by the pound 
of good castings produced when making prices. In the case 
of manganese bronze, the yield of good castings is often as 
low as 25 per cent of the charged weight, because of the heavy 
shrinkage and the need of long runners. The furnace loss 
may run 7J per cent, which brings the melting loss on a 25 
per cent yield to 30 per cent. 

Manufacturing Expense. The labor is distributed from 
the time cards returned by each department, as shown on the 
pay roll. Overhead is carried to each department in propor- 
tion to its dollars of labor.* The foremen are charged up to 
their respective departments, such as melting, molding, core- 
making, etc. Foundry clerks in charge of time cards, order 
cards and foundry records are charged to molding. The 
superintendent's time may be divided over melting, molding, 

* This indicates a survival of ancient and inaccurate methods. 
If wages in one department should be raised the proportion of 
overhead to cost of direct labor in that department should be 
decreased. Labor on machine molding should be charged with a 
heavier burden than labor on bench molding. 



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FOUNDRY COSTS 



173 



FOUNDRY COSTS 
Ibon Castino CoeT Shbit (Monthly Exhibit Sheet — Albert Wklton) 











Per Ton Good Casting | 












Material 




Account Item 


Net Tons 


Price 
per Ton 


Amount 






















Pounds 


Per Cent 


Cost 


Pig Iron Charged: 














D 


143.430 


13.62 


1953.52 








C 


4.200 


13.62 


57.20 








A 


136.050 


13.62 


1853.00 








L 

Total 


1.325 


16.02 


21.23 








285.005 


13.63 


3884.95 


1554 


77.7 


10.59 


Scrap, etc., Charged: 














Shop Scrap 


53.840 


12.00 


646.08 








Foundry Scrap 


222.205 


12.00 


2666.46 








ChiUs 


.630 


12.00 


7.56 








Bought Scrap 
Total 


.500 


12.00 


6.00 








277.175 


12.00 


3326.10 


I5I2 


75.6 


9.07 


Gross Metal Charged 


562.180 


12.82 


7211.05 


3066 


153.3 


19.66 


Less Scrap Produced: 














Defective Castings 


28.372 


12.00 


340.46 




7.7 




Foundry Scrap 
Total 


144.720 


12.00 


1735.64 




39.5 




173.092 


12.00 


2077.10 


944 


47.2 


5.13 


Net Metal Charged 


389.088 


13.79 


5133.95 


2122 


106.1 


14.00 


Fuel: 












• 


For Melting. Coal 


.750 


2.95 


2.21 








For Melting, Coke 


68.395 


4.80 


328.65 


376 


18.8 




For Core Ovens, Coke 
Total Fuel 


9.680 


3.70 


35.82 


52 


2.6 




78.825 




366.68 


428 


21.4 


1.00 


Fluxes: 














Limestone 


11.515 


1.00 


It 52 


62 


3.1 


.03 



General Foundry Expense 


1 Amount 1 


Cost per 




1 




ton. Good 








Castings 


General Factory Expense, Dept. No. 1 


775 


25 


2 


11 


Machine Shop, Dept. No. 2 


2' 


73 




06 


Pattern Shop, Dept. 10 


193 


27 




53 


Forging Shop. Dept. 15 


16 


33 




04 


Tool Room Dept. 16 


4 


14 




01 


Carpenter Shop Dept. 19 


16 


03 




04 


Suble and Hauling Dept. 32 


1 ^» 


15 




17 


Power Dept. 25 


431 


69 


1 


18 


Depreciation 


352 


70 




96 


Taxes and Insurance 


47 


52 




13 


45. Loss on Defective Castings 


302 


84 
65 




83 


Total General Foundry Expense 


2222 


6 


06 


42. Repairs, Maintenance and Supplies: 










Labor in Repairs and Maintenance 


165 


54 





45 


Materia! in Repairs and Maintenance 


69 


25 




19 


43. Tools and Miscellaneous Supplies 


551 


13 
92 


1 


51 


Total R. M. A S. 


785 


2 


15 


41. Producing Labor: 










A Foreman and Assistants 


357 


05 





97 


B Clerks and Weighers 


234 


26 




67 


C Hauling MeUl 


5 


10 




01 


D Molding and Casting 


4591 


20 


12 


52 
Jl5 


F Cleaning and Shipping 


421 


53 


1 


G Sand Blast Labor 


38 


96 




II 


H PickUng Labor 


97 


99 




26 


K Cupola Labor 


291 


83 




80 


L Inspection 


419 


40 


1 


14 


M Shaking Out Labor 


301 


50 




82 


N Core Making 


1399 


03 


3 


81 


P General, not included above 


395 


47 
32 


1 


0/ 


Total Producing Labor 


8553 


23 


33 


Total Metal, Fuel and Flux 


5.512 


15 


15 


04 


Total Labor and Expenses 


11.561 


89 
04 


31 


54 


Net Cost 366.6 Tons Good Castings 


17,074 


46 


58 



Total Number of Heats 
Coke used in Cupola per Heat 
Good Castings per Heat 
Iron Melted per lb. Coke 



25 

2.7 Tons 
14.663 
5.7 Pounds 



Metal Practice 


Tons 


Per Cent 


Good Castings 
Defective Castings 
Scrap 
Loss 


366.584 
28.372 

144.74 
22.489 


65.21 
5.05 

25.74 
4.00 


Gross Mptal Charged 


562. 185 


100 



Monthly Foundry Reports 

The metal reports of a large concern in New England 
have the following items.* 



Iron Foundry 




Brass Foundry 




Press Shop Metal 


Jan.| 




Jan. 




Jan. 


Pig. lb. 




Copper Melted 




Metal from Rack 




Scrap, lb. 




Other New Metal 




Product 




Back Stock.t lb. 




Scrap Turnings 
and Skimmings 




Resulting Scrap 




Gross Melt. lb. 




Back Stock 




% Scrap 




Less Back Stock 




Gross Melt 








Net Melt 




Less Back Stock 








Product 




Net Melt 








Loss in Melting 




Product 








% of Gross Melt 




Loss in Melting 
% of Gross Melt 









* Columns for 12 months and yearly total 

t The " back stock " consists of gates, sprues, etc. 



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BOOKKEEPING AND COST ACCOUNTING 



coremaking, and cleaning, when inspection, pattern making, 
machining, shipping and general are handled directly by a 
works manager. Arbitrary divisions of some items of the 
pay roll will be necessary, as they will vary with the size of 
the foundry and its general organization plan. 

Assuming an arbitrary set of figures for illustration, the 
following summary may be made. The figures are cents per 
pound: 



Department 


Labor 


Supplies 


Overhead 


Total 


Melting 


0.53 


o.to 


0.47 


1.10 


Molding 


1.03 


0.12 


0.94 


2.09- 


Coremaking 


0.29 


0.12 


27 


0.68 


Cleaning 


0.35 


0.10 


0.32 


0.77 


Inspection 


0.03 


0.00 


0.07 


0.15 


Shipping 


0.06 


0.04 


0.06 


0.16 


Machining 


0.02 


0.00 


0.01 


0.03 


Pattern Making 


0.03 


0.02 


0.02 


0.07 


General 


0,30 


0.10 


0.39 


0.79 


Total 


2.69 


0.60 


2.55 


5.84 



From such a summarj'^ ratios, or percentages of total ex- 
penses to molding labor, are obtained. For example, we have 
the ratio of total Manufacturing Expense to Molding Labor, 
5.84 to 1.03, or 5.67. A foundry having such a ratio could 
use 6 for this item in making up an estimate on castings 
which may be considered suitable to its plant and equipment 
and its class of labor and general organization. This ratio, 
however, assumes that all pieces are cored. Estimates on 
plain work under this plan would drop the item of coremaking 
from the summary giving a new ratio, and a lower estimated 
cost. Estimates on difficult cored work might double the 
coremaking item, but would retain the standard ratio of 
Manufacturing Expense to Molding Labor. From such a 
table several valuable ratios may be obtained. 

The supplies for the melting, molding, coremaking and 
cleaning departments are further subdivided from month to 
month, the costs being carried on the page with the summary. 

Buildings and Equipment. Any labor which the foundry 
applies to the upkeep of its buildings and equipment is charged 
to these accounts. Such labor carries with it certain materials 
(referred to as supplies above), as shown by requisitions. 
This labor should carry also its share of the Overhead, pro- 
portional to the dollars of labor applied. In turn the de- 
preciation applied to Buildings and Equipment is carried into 
Overhead each month, to be charged to the various items of 
Manufacturing Expense, as shown in the summar>'. Ex- 
penditures for buildings erected by contract, or for equipment 
by purchase, are charged to these accounts in the same way, 
and charged out regularly to Overhead. 

Estimating. The factors that enter into any estimate are 
shown in the following example: 



Metals 


30.00^ 


per lb. 


Melting Loss 


2.40 


32.40 


Molding Labor 


1.10 




Manufacturing Ratio 


6 




Manufacturing Expense 


6.60 


6.60 


Selling Expense 


1.20 


1.20 


Sale Cost 


40.20 


Sale Price (basis 10% profit) 




44.00 



The metals are figured on the basis of market quotations at 
the time. The melting loss assumes a 4 per cent loss in the 
furnace, with a 50 per cent yield of good castings. The 
molding labor has been estimated from a yield of 500 pounds 
for $5.50, direct molding cost. The ratio of 6 has been found 
to be correct for the foundry in question, within reasonable 
limits.* 

The Selling Expense is the average selling expense, per 
pound, for the past six months. It includes salaries of sales- 
men, traveling expenses, advertising, outbound freight, 
cartage, entertaining, bad debt reserve, commission reser\'e, 
discounts, etc. 



Illustration of a Cost Statement 

This account is the total of all the different alloys made. It 
might cover the following items: 

For the month of 



Alloy 
No. 


.Amount 
Charged 


Good 
Castings 


Bad 
Castings 


Gates 
and Risers 


Melting 
Loss 


1 
2 
3 
4 
5 


33,900 
49,400 
13.400 
15.500 
6.000 


19.000 
30.000 
8,200 
9.000 
3.800 


2000 
3000 

800 
1000 

400 


12,000 

15,000 

4,000 

5.000 

1,600 


900 
1400 
400 
500 
200 


Total 


118.200 


70.000 


7200 


37,600 


3400 



From this we have, averaging all metals: 

118,200 lbs. metal charged @ 28. Off 

Credit 7,200 lbs. bad castings @ 28. Off 

Credit 37,600 lbs. Gates and Risers @ 28.0^ 

73,400 lbs. metal consumed @ 28. Of 
70,000 lbs. good castings 

Productive Labor item 2 
Productive Labor item 3 

70,000 Good Castings, made @ 1 . 28^ 

Tonnage Group, items 4 to 6 
Tonnage Group, items 7 to 10 
General Expense Group, items It to 15 
General Expense Group, items 16 to 20 
General Expense Group, items 21 to 23 

70.000 lbs. Good Castings, made @ I SAi 
Total 70,000 lbs. Good Castings, @ 2.93^ 



$33.0%. 00 

2.016.00 

10.528.00 

20.552 00 



@ 29.36^ per pound 



$ 700 00 
200.00 

$ 900 00 

$ 300 00 
200.00 
300.00 
200.00 
150.00 

$1,150.00 
2,050.00 



The average manufacturing cost of 70,000 pounds of castings 
lA then 

Metals $20,552.00 

Manufacturing Expense 2,050 . 00 

Total (average per lb.. 32.29$f) $22,602 . 00 

♦ This method of applying the overhead, averaging it over the 
whole product and using a uniform ratio for all departments will 
give erroneous and misleading figures of the cost of castings if they 
vary in kind and size. The overhead on melting should cover 
cost of fuel, repairs of furnaces, breakage of crucibles, etc., and 
will usually be a high percentage of the direct labor cost of melt- 
ing, while the burden on bench molding is a low percentage. 

Averages and percentages based on averages should always be 
looked on with suspicion by cost accountants. 



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FOUNDRY COSTS 



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Summary. In summarizing it is assumed that depreci- 
ation has been charged to Expense, and that the Selling 
Expense for the month amounts to $1,000.00. 

Castings on hand at first of month 5,000 lbs. $ 1,500.00 

Good castings made during the month 70,000 lbs. 22,602 . 00 



Total @ 32 . OOfi per pound 75.000 lbs. $24, 1 02 . 00 

Good castings not shipped at end of month 10,000 

lbs. 3,200.00 



Castings shipped 65,000 lbs. 

To show the profit we have: 

Castings invoiced 65,000 lbs. 
Manufacturing cost of castings 65,000 lbs. 

Gross Profit 
Selling expense 

Net profit for the period 



$20,902.00 



$23,990.00 
20.902.00 

$ 3.068.00 
1.000.00 

$ 2.088.00 



Forms and Routine of the Direct and Indirect Items Plan. 

The Time Card of the usual time-clock type shows the 
hours worked, and the department or cost item (as molding) 
to which the wages are chargeable. The Time Clerk checks 
the employees' time during each day to prevent errors. All 
the wages on the Time Card are distributed and checked on 
the Labor Distribution Sheet. 

The Day Work Card is sent with the pattern to the molder. 
The Pattern Clerk enters the pattern, alloy and shop order 
numbers, date ordered, date wanted and castings wanted, 
and checks the cored or solid items. The Foundry Clerk 
enters the other items as the molder starts and stops, or 
completes the order. In noting the kind of patterns, full 
data should be entered, as for a plated pattern: " 10 on iron 
plate for 12 in.XlS in. Berkshire; 2 cores." This card is 
used for all patterns not working on a piece price basis. 




Form BFl Piece Work Card 

The Piece Work Card is used for piece work, it being 
advisable to use a different color from that of Day Work 
Card. 



CUSTOMER 


Pattern Number 






Address 




Kind of Pattern and reason for changing 1 Date 


O.K. 


Rate 


(«/«« s xS in.;ruUd lines ) 



















form No. 

Form BF2 Piece Rate Card for Pattern Changes 

The Piece Rate Card is the office record of the piece rate 
set by the Superintendent for any particular pattern. 



DAILY MOLDING REPORT 

Date 


Customer 


Pattern 
Number 


Shop Order 
Number 


Molder's 
Number 


Number Castings Made 


Cored 

or 
Solid 


Piece 
WoriL 


Time 


AJloy 


Foreman*s Comment 


Plated 


Gated 


Loose 




























{Site «J^ X iO in. 


, U ruled lines) 

- - - 


















• 



Form BF3 



When an employee is transferred from one department to 
another, as from Melting (4) to General Labor (5), during 



the day, notice of the transfer is sent to the Pay Roll Clerk 
by the employee's foreman. 



DAILY CASTING REPORT 

Date 


Customer 


Pattern 
Number 


Shop Order 
Numb«r 


Molder's 
Number 


Total Castings 


Good Castings 


Bad Castings 


Cored 

or 
Solid 


Piece 
Work 


Time 


Alloy 


Pieces 


Pounds 


Pieces 


Pounds 


Pieces 


Pounds 
































{SizeSyixlOin 


, U ruled lines) 





















































Form BF4 



The Daily Molding Report is made out each day by the 
Foundry Clerk, one copy going to the Superintendent, one 
to the Inspector, and one to the Cost Clerk. Time is entered 
in hours and tenths of an hour as 1.5. Piece-work must be 



indicated by a check (V), so that the Inspection Department 
may go over the piece-work castings first in order that the 
pay roll record may not be delayed. 
The Daily Casting Report is made out each day by the 



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176 



BOOKKEEPING AND COST ACCOUNTING 



CORE CARD 


Ca»tom«r 




Pattern Numb«r 


Dst«Ord«rwl 


AUoy Numb«r 


DataWaatMl 


(SlxtSxSin.) 


Nnmber of CocM Wantad 





Form BF5 



CORE ROOM 
PlacaWorkRcfiort 

Oatn 


Cnttomar 


NamlMr Raabw 


Made 


Piece 
Rate 


Amount 


Hoara 
P.W. 


Hoorm 
D.W. 




(Stz* 9H X SM /n 


..n //»«<) 
















♦ 














FoBU BF6 











Inspector. One copy goes to the Foundry Clerk, who from 
it makes out a Work Card (Day or Piece), for the required 
shortages; one goes to the Cost Clerk; and one to the Pay 



Roll Clerk, who checks the piece-work time against the Time 
Cards and Day Work Cards, to find the wages due each 
molder. 



MANUFACTURING EXPENSE CARD 


Customer 


Alio J Number 


Plated Changea in Pattern 

Gated 

Loose 


Pattern Number 


Date 
Run 


Sbop 
Order 
Numbw 


Good 
Plecea 
Mada 


Weight 
Good 
Pieces 


Average 

Weight 


Time 


Molder* 
Rate 


Amount 


Molding 

Coat 

Per 

Pound 


Core 
Makera 
Time 


Core 
Makera 

Rate 


Amount 


Tomi 
Amount 


Productive 
Labor Coat 
Per Pound 




{SU^tMxi 


#».. U ruled 


Itnet) 












































__ 



















Form BF7 



SUMMARIES 1 


Date 


From 
To 


Good 
Pieces 
Made 


Weight 
Good 
Pieces 


Amount 

Molding 

Time 


Molding 

Cost 

Per 

Pound 


Amount 

Core Making 

Time 


ODNlfakfac 
OMt 

FMBd 


Meul 

Per 

Pound 


Overhasd 

by 
Tonnage 


Overhead 

by 
Molding 


Overhead 
by Core 
Making 


Mfg. Coat 

Per 

Pound 


Mannger'a 
Comment 




































ISiMeSHi 


?«H/n..*r 


iletf tiiu$) 










































- — ' 

















Form BF8 



The Core Card is made out by the Pattern Clerk, and goes 
with the core box to the Core Room Foreman. The Piece- 
rate Card is used to register the piece rates on cores, being 
rubber stamped Cores Only. The number of good cores made 
is reported to the Pay Roll Clerk by the Core Room Foreman, 
on the card Core Room: Piece-work Report. 

Manufacturing Expense Card. It is considered best to col- 
lect the costs by customer, since his business must be treated 
as a whole, regardless of the fact that some particular pattern 
may run at a loss. To do this, the details are collected by 
pattern number. The Manufacturing Expense Card is sum- 
marized from time to time, to note the effect of tonnage, and 
particularly to note the effect of a revision in pattern as 
indicated by a comment in the space Change in Pattern. 
When a change is made, a new card should be started. In 
order that this card may check with the books the actual 
cost of metals consumed for this alloy for the month must be 
used. This is true also of the overhead ratios or per cents. 
The sum of all the costs shown on these cards, for any 
month must check, within close limits, to the books. The 
metal loss will be the average metal loss for the alloy in 
question. 

The Requisition Slip is used by the foremen, for supplies, 



as sand, coke, shovels and tools. A sununary of the Requi- 
sition Slips shows the supplies used for any period. 



REQUISITION FOR SUPPLIES 
To Storea Clerk Date- 



Kindly Supply Che following: 



(3tM9x9tn,;6UnM) 



Form BF9 



-Date- 



PLANT SUB-ORDER 
Dept. 



-No^ 



Description of work to be done, in detail 



(atxt 9H X *x iiu) 

















Coplea to 
















Signed by 1 



Form BFIO 

The Plant Sub-Order shows the labor expended on Build- 
ings and Equipment, covering reconstruction and changes, as 
well as repairs and renewals. 



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FOUNDRY COSTS 



177 



Mooth of DISTRIBUTION OF ITEMS OF EXPENSE 
Pounds G<Kxl Castinirs 


Day 


Molding 
Labor 
Ac^ 

2 


CoraM'k'g 

Labor 

Acct. 

3 


Total 

of 
Accta. 

2&3 


Melting 
Acct. 

4 


General 

Labor 

Acct. 

5 


Repair 
Labor 
Acct. 


Crudblea 

Acct. 

7 


Fuel 
Acct 

• 


Charcoal 
Acct. 


Refraction 

Acct. 

It 


Total 

of 
Acctt. 
4 to It 
































• 






Columntfor other 






{Site offo -m / 


i> af SM in.) 
































accountt lit: 


1 








































11. Foremen 














~ 




12. Clerka 






heading. CnfUinu^) % Acct. No. 2 

% Acct. No. 3 






19. CUanU g 










/i. Inapeciion 






Molding'. 

Shan of 

General Exp. 

Accc. 

M 


Total 
Acct. 
llto2« 


Core Room 

Foremen 

Acct. 

21 


Core Room 

Snppllea 

Acct. 

22 


Core Making 
Share 
General 


Total 

of 
Acctt. 
21 to 23 


Overhead 

Acct. 

24 


BuUdinga 

and 

Equipment 

25 


Total 






IS. Repairmen 










16. « 










17. Moldinjf Sakd 




- 




18. Other iuppliet 










































19. •• 




















































{Sir% 


led 


linet) 
































































- 


























































Totala 














































Accta.24 














































Per Lb. 






















1 


Ratio of Accta. 11 to Jl to Acct. No. 3 


Ratio of Accta. 21 to 23 to Acct. No. 3 




—J 



Form BFll 



Distribution of Items of Expense. On this sheet the 
daily or weekly expenses are summarized to complete any 
selected period, as one month. Accounts 2 and 3 are pro- 
ductive labor accounts. Accounts 4 to 10 are known as the 
Tonnage Group. Accounts 11 to 20 take the proportion of 
account 24 and the depreciation of accoimt 25 that account 
2 shows of the total of accounts 2 and 3. Accounts 21 to 
23, in the same manner take account 3's proportion of pro- 
ductive labor. Accounts 24 and 25 do not form part of the 
total cost except as distributed in this way. The proportion 
of accounts 2 and 3 is first determined. Account 24 is then 
distributed to its proper places. Depreciation of account 25 
is distributed in the same way. This distribution would then 
summarize as follows: 



Good Castings made 
Molding Labor Account, No. 2 
Coremaking Labor Account, No. 3 
Accounts 4 to 10 
Accounts 1 1 to 20 



100.000 lbs. 

$1,300.00 

500.00 

1,000.00 

1.200.00 



Accounts 21 to 23 

Accq^nt 24 

Account 25, 400.00 @ 10% 

ToUl Account 24 and 25 

% Molding Labor 75.0 

% Coremaking Labor 25.0 

Share of Accounts 24 and 25 

To Accounts 1 1 to 20 

Share of Accounts 24 and 25 to 

Accounts 21 to 23 

Revising this we have: 

Molding Labor 
Coremaking Labor 
Tonnage Group (4 to 10) 
General Expense: Molding (11-20) 
General Expense: 
Coremaking (21-23) 

Total 



500.00 

600.00 

40.00 

640.00 



480.00 
160.00 



$1,500.00 

500.00 

1,000.00 

1.660.00 



l.50$fperlb. 
0.50i(perlb. 
1.00^ per lb. 
1.68^ per lb. 



660.00 0.66^ per lb. 



$5,340.00 

Ratio General Expense: 

Molding, to Molding Labor 
Coremaking, to Coremaking Labor 



5.34^ per lb. 

1.12 
1.32 



WORKS MANAGER'S DAILY REPORT 

Date 


Alloy 


GroM 

Prodact 


W«ight of 
Good 


Weight of 
Bad CMtings 


Total No. of 
PiecMMMie 


No. of 
GoodPlecM 


No. of 
BmI Pieces 


X 
LoMby 
Weight 


Loeebjr 
Pieces 


Average No. 
of Hen 
PerDttT 


Average Wt 
Per Men 
PerDsy 


Average Wt. 

Per 

Ceetinc 




(Slzetyixsh 


in., 19 ruled It 


•«) 


















TottI 

















































Form BF12 



The Works Manager's Daily Report is made out daily, 
by the Cost Clerk, from the Daily Casting Report. 

The Metal Requisition is sent to the Store Room Clerk 
by the Metal Room Clerk. Through these requisitions the 
Store Room Clerk makes the necessary deductions on his 
stock cards, which gives him a perpetual inventory on each 
dass or group of metals. This Metal Requisition is also used 
by the Cleaning Room Foreman who delivers scrap back to 



METAL REQUISITION 

Date 


Pouadi 




(Am 9x»Hin ; 


s ruled linet) 










~1 




Received by 


Checked by 1 



Form BF13 



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178 



BOOKKEEPING AND COST ACCOUNTING 



the metal room, and gets a receipt for the amount. This 
enables the Metal Room Clerk to carry an inventory of each 
alloy, on the metal room stock card. 



HEAT TICKET 
HcAt No- 



Alloy No. . 



Pounds Wanted . 
RMnftriu 



(aix« s^x» tn,:* ruled lin«») 



Form BF14 

The Heat Ticket h issued by the Melting Foreman on the 
Metal Room Clerk, for each heat wanted. Each heat ticket 
is passed through a time clock conveniently located, as the 
heat is sent to the melting department. 



METAL REPORT 


Heat 

Number 


Furnncc 
Nnmber 


Alloy 
Number 


Total Clan A iL. * • . - Ciaaa A 2 


COPPER 


Charge 


MctaU 


^lau i\. 1 
Metals 


MetaU 


Lot No. I Pounds 


(fltoe 


qfForm 


if X a in,; 










{Ten addUi(mal 




U ruled Un^t) 








/(frTtn, Lead/Ztnc,\ 












Phc 


m Oopper,Pho».Ttn 
^nd.A2.Meta.Lb8.)- 













Form BF15 

The Metal Report is made out each day, by heats, and is 
summarized for the week or month. It shows every pound 
of material that goes into the furnace. The net metal con- 
sumed during the period is arrived at as illustrated in the 
following example: 



Id Metal Room December let 
From Store Room 
From Cleaning Room 

Total 

Issued on Heat Tickets 

In Metal Room December 31 at 

Lost in Melting 

Total 



40.000 lbs. 
15.000 lbs. 
10,000 lbs. 

65,000 lbs. 

40.000 lbs. 

23.000 lbs. 

2.000 lbs. 

65,000 lbs. 



Each alloy must be handled in this way. 

General. To make a success of any Cost System the 
mechanical details of handling and recording operations must 
be closely followed. Stock cards must be carefully kept; 
bins must be provided in the store room and metal room. 
Defective castings and gates and risers and other scrap must 
be returned to the metal room, and the proper records kept 
of the return. Cleanliness and orderliness must be main- 
tained. Records must not be allowed to fall behind. 

The accompansdng cost forms (here reduced in size to 
save space) may be obtained, with prices, from the Service 
Bureau, National Founders' Association, 29 South La Salle 
St., Chicago. 

Caution in Regard to the Use of Fonns. The Cost of 
Qoods does not Include the Cost of Selling them. (Extracts 
from "Efficient Cost Keeping," by E. St. Elmo Lewis.) 

Great care should be taken in the introduction of a cost system 
in a factory. A firm manufacturing a specialty and employing 
about 1200 men in the factory, introduced a system that ulti- 
mately required nearly 250 printed forms. When these forms 



were rearranged and a proper system was installed, all but 23 of 
them were discarded. The saving, of course, was tremendous. 

Before installing a cost system, it is important to decide what 
you want it to tell you. Analyze your conditions closely, then 
see that the cost system fits these conditions. 

Over-systematizing generally comes as a result of *' letting the 
system work out itself," instead of having some specialist come 
in and work out a complete plan of cost keeping, coherent, logical, 
thorough, with definite objects in view. 

Mere forms do not make a system; nor doe^ an adding machine, 
a t3rpewriter, or a few clerks make a system. They are simply 
the physical expression of a system. 

No form should be put in operation until it has been carefully 
considered, both in its relation to the specific thing that the form 
is to record, and in its relation to every other form in the sj'stem. 

Put on the form just as many data as you consider necessary. 
Don't use any one form for entirely different classes of data. 

The cost of goods when placed in the shipping room does not 
include the expense necessary to market the product. 

Selling expense varies even more than manufacturing cost. 
Selling expense is often several times the complete manufacturing 
cost. 

Manufacturing costs and selling costs are two separate and 
distinct propositions and must not be confused with one another. 

The cost system should fit the business. A system well 
adapted to meet the needs of a machine-tool concern would not 
fit a dairy and vice versa. 

''Improving the system of management means the elimination 
of elements of chance or accidenty and the accomplishment of all 
the ends desired in accordance with knowledge derived from a 
scientific investigation of everything down to the smallest detail of 
labor, for all misdirected effoH is simply loss, and must be borne 
either by the employer or employee.''* — H. L. Gantt. 

COST AND PRICE OF COAL f 

Four general items of cost normally control the price of coal 
to the Consumer: 1. Resource cost (the amount charged as the 
value of the coal in the ground); 2. Mining cost; 3. Transpor- 
tation cost; 4. Marketing costs. Under asual conditions each 
of these items includes a margin of profit. 

The cost of mining is divided between labor, 70 to 75 per cent; 
material 16 to 20 per cent; taxes, less than 1 per cent to 3 per 
cent for bitiuninous coal, and 3 to 7 per cent for anthracite; 
eeUing expenses, nothing to 5 per cent; workmen's compensa- 
tion for injuries may reach 5 per cent for bituminous coal. The 
census of 1909 indicated an average mining cost of $1 a ton for 
bituminous coal and S1.S6 for anthracite. 

The taxes in West Virginia last year (1915) levied on coal lands 
and coal mine improvements were equivalent to nearly 3 cents 
per net ton of coal produced. 

The average selling cost for bituminous coal is probably 5 to 
10 cents per ton, and for anthracite coal the usual charge of sales 
agencies is 10 cents a ton for steam sizes and 15 cents for the 
prepared sizes. 

In interstate traffic, both rail and water, bituminous coal 
probably pays an average freight of $2 per ton; the average for 
anthracite is higher. 

The cost of handling the coal, exclusive of freight, from the 
time it leaves the producer until it is in the consumer's bin, may 
be termed the marketing cost. Coal that gets a long wa^' from 
the mine may pass through many hands before it reaches the 
consumer, and it not only pays commission all along the Hne, but 
is subject to shrinkage and deterioration. The margin in the 
retail business between cost on cars and price delivered is from 
$1.25 to $2 per ton, and is not more than nnough to give on the 
average a fair profit. 

*0r passed along, by means of increased selling prices, to the 
final consumer. — W. K. 

tThe reference to the authority for these statements has been 
mislaid. 



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COST AND PRICE OF COAL 



179 



The resoturce cost, what the operator has to pay for the coal 
in the ground, is expressed as a royalty or depletion charge. One 
of the latest leases by a large coal land owner (the Girard Trust 
of Philadelphia), provides for the payment of 27 per cent of the 
selling price of the coal at the breaker. This is equivalent to $1 
a ton tribute paid to private ownership. The present average 
rate of royalty on anthracite is probably between 32 and 35 cents 
a ton on all sizes, which is from 12 to 14 per cent of the selling 
value at the mine. The tendency is still upward. At the begin- 
nign of the last century the great bulk of the anthracite lands 
were patented by the State of Pennsylvania for $2 to $4 an acre; 
in the middle of the century the price of the best land rose to 
$50 and in 1875 to $500. Now, $3000 an acre has been paid 
for virgin coal land, and little is on the market. The present 
average resource cost of bituminous coal is not much over 5 cents 
a ton or about 4 per cent of the average seUing value at the mine. 
In the Pocahontas and Pittsburg di3tricts the royalties are 
much higher. 

The prospects of relief from high prices of coal are not prom- 
ising. The prices of labor and material for mining tend to 
advance. The mining methods are far less wasteful than for- 
merly, the average recovery in anthracite mining being 65 per 
cent as against 40 per cent only 20 years ago. Not much further 
improvement can be made in this direction. The increased 
safety of mines and the workmen's compensation laws add some- 
thing to the cost of coal. Reduction in the cost of marketing is 
possible; it is stated that the delivery of coal is costing the 
retail dealers 50 cents a ton more than is necessary. 

Exact mining costs cannot be determined until the operators 
have accomplished their reform of standardized accounting. 
Too often the operator includes in his account only the two 
largest items, labor and material. When the market for bitu- 
minoiis coal is dull, the company whose land costa little or noth- 
ing is able to set a lower limit of price than the company whose 
coal must stand a charge of 5 or 10 cents or more, be that charge 
called royalty, depletion or amortization. The analysis of the 
cost elements that enter into the price of coal, emphasizes our 
lack of specific facts which can be supplied in the future only 
through the ''installation of uniform cost-keeping methods and 
uniform and improved accounting systems." to quote from the 
declaration of purposes of the Pittsburg Coal producers. With 
the results of such bookkeeping in hand, more definite reply can 
be made to the public's appeal for relief from high prices. 

Cost of a Ton of Anthracite Coal from Mine to Cellar * 

A ton of anthracite of stove coal (2240 pounds) delivered in 
the coal bin in New York District at $7.25 averages at the mine 
$3.55 and yields a return on the investment of 20 cents. 

^From an advertisement signed by the leading anthracite coal 
operators. Philadelphia Press, Feb. 14. 1916. 



Retailing Cost (Average) per ton: 

Rent of office and yard; lighterage, handling at yard, 
breakage, cartage, administration expenses, and re- 
tailer's profit per ton $2.15 
Transportation (Average) per ton: 

Freight from Lehigh and Schuylkill regions to Now 

York harbor 1.55 

Production cost (Average) per ton: 

Colliery cost, per ton, labor (approximately $1.80^ 

materials of all kinds, royalty, taxes, depreciation of 
coal lands and equipment, administration expenses, 
and accident indemnities per ton 2 . 40 

Loss on small sixes of coal sold at less than cost of pro- 
duction .95 

Operator's earnings, available for return on investment 
(Latest report of U. S. Census shows less) .20 



$7.25 



Anthracite coal as it comes from the mine is a mixture of all 
sizes, from lump to dust, and contains a certain amount of rock, 
slate and bone. 

The report of the U. S. Geological Survey for 1914 gives the 
amount and percentage of each size produced in that year in the 
entire field. By using these percentages and by assigning to 
each size of coal the average receipts at the mine realized by some 
of the larger companies it is determined that each 100 tons of coal 
dumped into the breaker would produce the following average 
results: 







Tons 


Average 

Price 
Realised 


Total 
Value 


Domestic . sises sold 
above the cost of 
production in 1914 

Bises sold below cost 
of production in 
1914. 




Lump and broken 

Egg 

Stove 

Chestnut 

Pea 

Buckwheat 

Rice 

Barley 


5.30 
12.40 
20.60 
23.00 
11.80 
13.40 
6.80 
6.70 


$2.95 
3.45 
3.55 
3.75 

> 1.30 


$15.63 
42.78 
73.13 
86.25 

50.31 






100.00 


268.10 



Average value per ton, $2.68. 

Losses from shrinkage, storage and rehandling bring the price 
down to about $2.60 per ton at the mine, to which adding loss in 
small sizes sold below cost of production (95 cents) makes a 
total of 3.55 per ton. The anthracite operator gets from 55 cents 
to $3.75 per ton for his coal, seUing 40 per cent of his output below 
the cost of production. 



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CHAPTER XVIII 
HARDWARE FACTORY AND MACHINE-SHOP ACCOUNTS 



ACCOUNTING SYSTEM IN A LARGE HARDWARE 
FACTORY 

A large factory employing over 4000 men makes a great 
variety of hardware and other metal products. Its cata- 
logues list over 40,000 varieties of product and the machining 
and other manufacturing operations required are stated to 
be over a million in a year. What follows is largely taken 
from the " accounting code " of this factory and from ex- 
planations kindly furnished to the author by the manage- 
ment. By request the name of the factory is omitted. 

The accounting and other clerical work having relation 
to records of production and of costs is divided into three 
divisions: Accounts, Statistics and Costs. The accounting 
system records the results of the business by classes of product 
and as a whole, the statistical system furnishes additional 
information required by the management, and the cost system 
is designed to furnish approximate costs per unit of each kind 
and size of finished product. 

Productive Classes and Departments. The whole prod- 
uct of the factory is divided into " Productive Classes," rep- 
resented by the letters A, B, C, etc., and the different manu- 
facturing departments in which the work is done are repre- 
sented by other letters or by numbers of rooms, these letters, 
both of product and departments, and room numbers being 
used as accounting symbols. The principal departments are 
Forge, Iron Foundry, Brass Foundry, Press Shop, Rod Shop, 
Machine Shop, Plating Department, Power Plant; and minor 
departments are assembling and inspecting rooms for different 
products, stock rooms, japan shop, pattern shop, tool shop, 
and drawing, packing, shipping and other rooms. 

All work done in, and all material used in, any department 
is charged directly as far as possible to the Class Accounts, 
A, B, C, etc., and all expenditures that cannot be so charged 
are either charged to the department or to one of several 
factory or other expense accounts or to a betterment or a 
special account. Charges to department or to expense 
accounts are summarized monthly and apportioned to the 
several class accounts according to definite rules established 
by the Accounting Bureau. 

Accounting Symbols. The terms used in the accounting 
system are defined as below, and each is given a letter sjmabol. 

Direct Labor: All labor spent directly on salable products. 

Material. All material that becomes part of the salable 
products. 

Indirect Labor: All labor that cannot be charged directly 
to one or more classes of product. 

Supplies: Articles other than "Material" used in the 
plant. 



Shop expenses: Indirect labor, supplies, salaries and other 
items charged to expense accounts. 

Stores: Stocks of materials and supplies (not finished 
products). 

Betterments: Additions to and betterments of property. 
Divided into three groups (1) Real Estate and Buildings, (2) 
Power Plant, Equipment and Fixtures, (3) Machinerj-^, Tools, 
Patterns and Flasks. 

The Expense accounts are subdivided into fifteen groups, 
each with a sjmabol number, viz. : 

1. Indirect Wages, including foremen, machine setters, 
time-keepers, time-study men, route-board men, order clerks, 
stock handlers, watchmen, inspectors, yard laborers, cleaners, 
sweepers, janitors, errand boys and other miscellaneous labor. 

2. Bonus payments for overtime. 

3. Welfare work. 

4. Freight and express. 

5. SUppage, difference between estimated and actual labor 
costs. 

6. Shop stationery. 

7. Maintenance of existing equipment and fixtures. 

8. Maintenance of machines, tools, patterns and flasks. 

9. Maintenance of real estate and buildings. 

10. Water. 

11. Gas and electricity. 

12. Works salaries, general. 

13. Wages paid to injured employees, and pensions. 

14. Spoiled work. Lost labor and material on work 
scrapped. 

15. Miscellaneous supplies and charges not otherwise pro- 
vided for. 

Stores accoimts are subdivided into several sub-accounts, 
each with its appropriate symbol, such as SC, Central Scrap 
Store; SE, Plant Supply Store; SP, Press-shop Metal; 
SS, General Supply Store; SU, Power-house Fuel; SV, Other 
Stores. 

Stores Records. Stores records are kept in the Stock and 
Order Department on Perpetual Inventory or Balance of 
Stores Cards, size 7iX4i in. The headings on the end of 
each card are printed as below: 



WHERE STORED ACCOUNT 

LIST No. PART No. 


i 


Sh«lf 
Sect. Drawer 


Max. Econ. Quaa. 1 
Min. 1 


— 


— 


~ 




3 


— 








— 




— 




— 




__ 




— . 






— 


r 





Form HFl. Balance of Stores Card. 



180 



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HARDWARE FACTORY AND MACHINE-SHOP ACCOUNTS 



181 



And the heads of columns are printed on a long side, as made on a long paper strip, giving the Clock No. of the work- 



follows: 



ORD£ECIi 


RK^EIVCS 


ox 

RAND 


DEUTERED 


ALLOTMENT RECORD 

ALLOTES blilPPEJ) 


^.^ qiMMU; 


D^Quutk, 


QwntitT 


Of 


qu^Mtj 


Dm. 


NiUBbW 


Quuthr 


[>M. 


Qourttty IWaao. 


i^atUnrt 


■ 4 i>erinci 


1 












































. 

















Entries are made on these cards from purchase invoices 
or other records as goods are received, and from Stores 
Tickets, signed only by authorized persons, when goods are 
delivered. 

In the stores connected with the iron and brass foundries 
and with the fuel supply (other than steam fuel) charge books 
are kept. At the end of each month the Accounting Bureau 
sunmiarizes the entries in these books and makes proper 
credits and debits, and extends and summarizes the Stores 
Tickets, crediting and debiting the proper accounts. 

On all stores tickets are entered the symbol of the room in 
which the materials or supplies delivered from the stores are 
to be used, also the charge account symbol, which is the class 
sjTnbol, A, B, C, etc., if the materials are to be used directly 
in one class of product, or a department symbol, M, N, P, 
etc, if they are to be used in a department on more than one 
class, or the sjrmbol X to show that they are to be used for 
general purposes and cannot be charged either to a Class or 
to a Department, or a Betterment Account symbol XA, XC, 
etc., if they are to be used for betterments. 

Every expense charge is indicated by a numerical symbol 
(1 to 15) followed by the symbol of a Class, or of a Depart- 
ment, or by X. 

Example. Miscellaneous supplies (15) for the Press Shop 
(?) would be charged to 15P if they were to be used on work 
of various classes. A repair part (8) for a press used in Class 
A goods exclusively would be charged to 8A, but, if for a 
press used for more than one class of work, to 8P. 

Expense Charges. Indirect (or so-called " Non-produc- 
tive ") labor is charged on labor or job tickets in the same 
way that material is charged on store tickets. For example a 
charge for the wages of a bus-foreman who spends all his 
time on Class A work is 1 A; if he spends half his time on Class 
A and half on Class C, the charge is i lA, i IC. If his time 
cannot be charged directly to a class or to a department then 
the charge is IX. 

In this particular factory, accounts are kept for selling and 
administrative expenses and with branch offices and stores. 
Each is subdivided, with numerical symbols representing 
salaries, traveling expenses, rent, stationery and supplies, 
telegrams, postage, etc., to which any expenditure on behalf 
of these accounts is charged. Thus, if Chicago office (53) 
sends a telegram (117) about Class A goods the charge is 
53A, 117. 

Time-keeping. Credit to Workman on Pay Roll. 
Verification of Pay Roll. 

The time of each employee is registered by a Day Clock 
Recorder, which is placed in each room or group of rooms 
occupied by from 100 to 250 employees. The clock record is 



man, and the In and Out time, a.m. and p.m. 

Each morning the clock records of the day before are 
transcribed to Time Summary Tickets, one for each man, on 
which his total hours for a week are added up. 



" Time Summary Ticket 


Room No. 




Name 






D«t« AM. 


P.M. 


Totsl Hn. 


Irregularity 


(9 Unfa Ah per 


tnoh) 




















J 
















1 \— 




rh«^lr#iH Aj 


►pro-^ 


^*/1 















Form HF2. Time Summary Ticket (5X3-in.). 

The work done by each man during a week is reported to 
the Pay Roll Room by jobs, as each job is finished, on Day 
Work Credit and Piece-work Credit Tickets. If a man's 
job is not finished at the end of the week a new job ticket is 
issued to him or to his foreman for the next week.* 



i«^»i iJJo Day Work Credit Ticket 


Fin, 


Total 
Hours 


Amount 


Start 


Room 


Dept. 


Clock No. Name 


Chs. Acct ' Mach. No. O.H.S. 


Part No. Order No. Day Rate 




Hours 


Pieces 


Value 








Rate 






Value 




1 



Form HF3. Day Work Credit Ticket (5iX3i in.). 
A similar ticket of a different color is used for piece work. 



Room No.. 
Dept. 



Piece Work Credit Slip 



Clock. No.. 
Work. 



. Cut No.- 
Name- 



Date |Mach. Noj 
{s lines 6 per i^h} 



Charse 
_ Acct. _ 

Order 

No; — 

_Rate__ 



Time In 
Hours 



Pes. Finished 



Approved - 



DuiJicate printed in red ink below the create line^ on the reverse aide. 



Form HF4. Piece-work Credit Sue (5iX3 in.). 

* In this factory a "week" is a pay-roll period, the month being 
divided into four periods ending respectively on the 8th, 15th, 22d« 
and the last day of the month. 



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BOOKKEEPING AND COST ACCOUNTING 



These tickets are made in duplicate, by carbon paper, and 
one copy is kept in the office for record and the other goes to 
the workman, who hands it back when the job is complete. 

As the tickets are returned to the Pay Roll room, the time 
clerks place them in the order of the Clock Nos., by depart- 
'ments, and file them along with the Time Summary Slips 
until the end of the week. They are then tabulated on a 
Burroughs adding machine for Clock Nos., Hours and 
Wages for each job, and Total Hours and Total Amount for 
the week, for each man. The total hours thus found are 
checked against the total hours on the man's Time Summary 
Ticket. If any discrepancy is found it is investigated and the 
error corrected. 

The Pay Roll Sheets for each room are then made out. 
Stencils with the names of the men and their clock numbers, 
in the order of the numbers, are put in an Addressograph 
machine, and thus printed on the sheet, and the hours and 
amount are entered on it by a recording and adding machine. 



On pay day each man's money is put in a pay envelope on 
which his name and number are printed, the envelopes are 
arranged in the order of the numbers and put in cases for each 
room and sent to the rooms. The men form in line in the 
order of their numbers and as they march past the pay 
window, and are identified by their foreman who stands by, 
each receives his envelope from a clerk. 

The Hollerith Tabulating Machine Record. When the 
Day Work and Piece-work Credit Tickets have been checked 
against the Time Summary Tickets the records on them are 
punched on Hollerith Tabulating Cards for use in the Hollerith 
sorting and tabulating machines. (For description of these 
machines see page 135.) The information given on the 
punched cards consists of the following items: Year, Month, 
Week, Room, Clock No., Productive Piece Work, Expense 
Piece Work, Special Shop Orders; Expense or Operation 
No., Class Letter (kind of product). Order No., Betterment 
or Repairs, Hours, Pieces, Amount. 



1 

Ko 

2 


1 

Wk 

2 
3 


131517 

TEAR 

141618 


Spadil 




Olook 

000 





Operation 


Clurgt 
AceU 




Order Kamber 

X 

010 





Betterment 

or 

Repairs 

X 




1 






PtWlM 

X 

00 00 


Amount 


3 




















00 


4 


4 


Til 


11 


1111 


1 1 


1 


1111 


1 1 


1 1 1 1 ill 1 

1 


1 


1111 


1 


1 1 


1 


11111 


1 1 


1 1 


5 




2 2 2 


2 2 


2 2 2 2 


2 2 


2 


2 2 2 2 


2 2 


2 2 2 2 2:2 2 


2 


2222 


2 


2 2 


2 


2 2 2 2 2 


2 2 


2 2 


ie6 




3 3 3 


3 3 


3 3 3 3 


3 3 


3 


3 3 3 3 


3 3 


3 3 3 3 3|3 3 


3 


3333 


3 


3 3 


3 


3 3 3 3 3 


3 3 


3 3 


"7 




444 


44 


4 4 44 


44 


4 


444 4 


44 


4 4 4 4 414 4 


4 


4 444 


4 


4 4 


4 


4 4 444 


4 4 


44 


8 




5 5 5 


55 


5 5 5 5 


5 5 


5 


5 5 5 5 


5 5 


5 5 5 5 5:5 5 


5 


5 5 5 5 


5 


5 5 


5 


5 5 5 5 5 


5 5 


55 


9 




6 6 6 


6 6 


6 6 6 6 


6 6 


6 


66 6 6 


66 


6 6 6 6 616 6 


6 


6 6 6 6 


6 


6 6 


6 


6 6 6 6 6 


6 6 


66 


to 




iV'i 


7 7 


Ti'il 


7 7 


7 


i'l 1 1 


7 7 


7 7 7 7 7i7 7 


7 


7 7 7 7 


7 


7 7 


7 


77777 


7 7 


7 7 


11 




8 88 


88 


88 88 


88 


8 


8 8 88 


88 


8 88 8 8:8 8 


8 


8 8 8 8 


8 


88 


8 


88 88 8 


8 8 


88 


12 




9 9 9 


9 9 


9 9 9 9 


9 9 


9 


9 9 9 9 


9 9 


9 9 9 9 9l9 9 


9 


9 9 9 9 


9 


99 


9 


9 9 9 9 9 


9 9 


99 



Form HF5. Card for Tabulating Machine. (Full size.) 



All the cards are kept in piles by rooms or departments until 
the end of the month. There may be as many as 100,000 of 
them. The sorting machine is then used to sort them in any 
way that may be desired for statistical or accounting purposes, 
such as by departments, classes of product, order numbers, 
etc., and after subdivision by this machine the tabulating 
machine is used to add up the totals of hours, pieces and 
wage amounts of any subdivision, for example, the monthly 
total of hours, pieces and productive day work on Class A in 
Room No. 104. The total figures thus obtained are written 
down in the columns of statistical sheets for the use of the 
statistical, cost and accounting departments. 



Monthly Statistical Sheets Derived from the Hollerith 
Cards, Pay Roll Distribution 

The Hollerith cards, punched according to the records on 
the Day Work or Piece-work Credit Slips, are arranged in 
piles representing producuig rooms or groups of rooms, or 
departments, about 40 piles in all. Each pile is then run 
through the sorting machine and divided and tabulated so 
as to give the total hours and amounts, which are entered in 
writing as the machine shows the total figures, on a long 
statistical sheet which has hours and amount columns for 
each of the following headings: 



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HARDWARE FACTORY AND MACHINE-SHOP ACCOUNTS 



183 



an 

STATISTICAL DISTRIBUTION OF PAYROLL FOR MONTH OF 1916 


Room 
orDept. 


PRODUCTIVE PIECE WORK 


TOTAL PIECE WORK 


PROD. DAY WORK 


BETTERMENTS 


SPECLU. 


TOTAL PROD. 




Special Operations 


Hours 


Amount 


Hours 


Amount 


Hours 


Amount 


Hours 


AmoBBt 


Hours 


Amount 


Hours 


Amount 


Hours 


Amount 


21^1 

B. Group 

C. " 
Power 

Tfanaportatioii 

Yard 

General 

{About SO lines 
in all) 






























(Headlnga oonttnued) 


TOTAL EXPENSE WORK 


REGULAR EXPENSE NOS. 


(Seven other 
number oolunu) 


TOTAL 
PAYROLL 




Hours 


Amount 


1 


2 


Hours 


Amount 


Hours 


Amount 


Hours 


Amount 




















• 



Form HF6. Statistical Distribution of Pay Roll. 



This sheet distributes the total pay roll, giving both hours 
and amount of wages, whether day work or piece work, by 
rooms or departments, whose symbols are given in the column 
at the left, and by the different kinds of work named in the 
heaxlings of the hours and amount columns. 

A second sorting isind tabulation of the cards is made for 
the Accounting Department, giving amounts only and not 
hours of labor, dividing the labor into Direct and Indirect, 
and subdividing each into classes of Product, as A, B, C, for 
so much of the labor as can be directly charged to such 
products; into labor for making different kinds of supplies, 
SE, SF, etc., for betterments XA, YC, etc., and for special 
orders not otherwise classified. One large sheet is made for 
Direct (or so-called " Productive ") Labor, and another for 
Indirect or " Non-productive." 

Of the latter, as much as is possible is entered in the 
" Class " colunans A, B, C, etc., on the basis of special studies 
made by the management of the Accounting Department 
(for example, part of the time of a foreman in the Press 
Shop might be charged to one or more of the classes. 



and part to the Press-shop symbol, P), and the remainder, 
called the " Residuum," is charged to the various supply, 
betterment, department, or room expense symbols. When 
the " Residuum " columns are added up thieir totals have to 
be apportioned in some way to the several classes of products, 
A, B, C, or to supply or betterment accounts, or to special 
orders which do not come under these headings. The prin- 
ciple upon which this apportionment is made is to charge the 
" Residuum " of any department to the different classes in 
proportion to the direct labor done in that department for 
these classes. For example, if 30 per cent of all the direct 
labor of department M is done for Class A, and the total 
" residuum " of department M for a given month is $1000, 
then $300 of that amount would be charged to Class A. 

Accounting Distribution of Pay RoU 

This distribution shows charges against Classes or De- 
partments. It distributes from rooms into classes. The 
figures are amounts only, not hours, taken from the second 
running of the cards through the tabulating machine. 











Productivb 








• 




Rooms or Dept. 




Class 


SE SF SS ST 


Special 


Better- 


N. Y. 


Total 


Mfg. Rooms 


(Twelve columns) 


Total 


(Four columns for di£ferent kinds stores or 


Orders 


ments 


Office 


Prod. 




A, B, etc., to L) 




supplies) 










Dept. C 






















Dcpt. D 






















Dept. L 






















etc. 






















Other Rooms 


























(Headings continued on Second Page) 














Non-Pboductivb 


Rooms or Dept. 






Residuum 




ToUl Non-Pro- 
ductive 




(Twelve columns 


Mfg. Rooms 


L. M. N, 354, P. R, T, U, V, SF. etc. 


Others 






AtoL) 




(15 oolumns) 







FoBM HF7. AccouNTXNa DiSTBiBtmoN OF Pat Roll foe Month. 



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BOOKKEEPING AND COST ACCOUNTING 



The Non-Productive (or indirect) Labor is charged directly 
as far as possible to the Classes of Product, A, B, C, etc., 
on the basis of special studies by the manager of the Account- 
ing Bureau: thus the time of the foreman of the Press Shop 
would be charged as far as possible to Classes A, B, C, etc., 
and the amount not so charged is called Residuum, charged 
to Press Shop or to any other department to which the fore- 
man rendered service. This Residuum is charged at the end 
of each month, by journal entry, to the Classes in proportion 
to the productive labor done in that department for these 



J. E. No. 201 
Feb. 1916 
Posted to 
Works Ledger 



Journal Entry 



Subject 



Distribution of Pay Roll as shown in sheets " Accounting 
Pay Roll Distribution." 





Con- 


Class 




Description 


trolling 


or 


Detail 




Account 


Dept. 




Dr. Work in Progress, Labor 


100,000 




15,000 

30,000 

etc. 


Dr. Work in Progress, Expense 


100,000 




20.000 
40,000 

etc. 


Dr. Residuum Expense 


20.000 


L 


4.000 






M 


6.000 






N 


2.000 






etc. 




Dr. Power Plant 


2.000 






Dr. Betterments 


1.000 


YR 


200 


Dr. Special Shop Orders 


3.000 


YT 


800 


Dr. Stores 


2,000 


fcE 


500 






ss 


600 






etc. 




Dr. Melted Metal 


10,000 


MC Iron 


6,000 






MT Brass 


4,000 


Dr. Private Ledger (Charge for some 








work not pertaining to Factory 








Product.) 


100 






Cr. Private Ledger (for sura of Dr. 








entries 


238,100 







Journal Entry 



J. E. No. 202 
Feb. 1916 
Posted to 
Works Ledger 



Subject 



Materials purchased, as shown in Invoice Record Sheets 





Con- 


Class 




Description 


trolling 


or 


Detail 




Account 


Dept. 




Dr. Stores 


50,000 


SA 


20,000 






SB 


20,000 






etc. 




Dr. Expense Supplies 


10,000 


sc 


5,000 






etc. 


2,000 


Dr. Power Plants 


10,000 


F 


9,500 






U 


500 


Dr. Betterments 


5,000 


YR 


3,000 






YT 


2,000 


Cr. Private Ledger 


75,000 







By the above entries Private Ledger Acct. (which is the 
same as "Company" or "New York Office") is credited with 
everything that the Company does for the factory in the 
way of sending checks to meet its pay rolls and paying its 
bills for purchasing of all kinds, and the debit entries divide 
the total smns thus credited among the several principal 
controlling accounts and subordinate a^^counts kept in the 
Factory Ledger. 

Numerous other journal entries are made each month 
from other statistical sheets, distributing the "residuum" 
expenses of departments M, N, P, etc., the several subor- 
dinate store accounts, melted metal, expense supplies, 
power plant, repairs, crediting these accounts and charging 
maintenance and other expense accounts, the several pro- 
ductive classes, betterment accounts and special accounts, 
such as Experiments, and Adjustment Accounts, which 
are used to spread over a year or longer certain charges 
such as Insurance, Taxes, Extraordinary Repairs, which 
should not be charged against the product of the particular 
month in which they are incurred or are paid for. 

The object of all these entries and counter entries is 
finally to distribute and post in the Factory Ledger all the 
monthly cost of running the factory (which in the first two 
entries has been credited to Private Ledger Account) to the 
cost of producing the several classes of goods, and to better- 
ment and other accounts which represent assets. 

The journal entries are not made in a book, but on loose 
sheets. They may originate from the statistical clerks who 
make the sheets for distribution of labor, stores, and expense 
accounts, or from an officer of the company who has au- 
thority to determine, for example, whether a certain expend- 
iture shall be charged as a betterment or as a repair, or 
what adjustments shall be made for changes in value of 
material, but all journal entries before being posted are 
verified and passed upon by an auditor or other authorized 
person. 

Works Ledger 

The Works Ledger, into which the Journal Entries are 
posted, is of an unusual form, designed especially to mini- 
mize clerical labor, and to get a great amount of mforma- 
sion recorded in a small space where it may easily be foimd 
by officers who may have occasion to use it. 

Each account, whether controlling or subordinate, is given 
a single pa^e, which lasts usually a whole year, except 
Residuum Account, which has a page for each month, as 
there are many cross-entries and adjustment entries to be 
made in this account. The ruling of the ordinary accounts 
is as follows: 











Works Ledqes 
















1916 


Labor 


Expense 


Material 


Other Accounts 


1 Total 


Jan. 

Feb. etc. to 
Dec. 




- 




1 








— 




— 




- 






Total 





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HARDWARE FACTORY AND MACHINE-SHOP ACCOUNTS 



185 



A page of Residuum Expense Accoimt, which contains 
the remainder of the expenses and supplies that have not 
aheady been distributed to the Classes of Products appears 
as follows (the actual page, of course, has many more en- 
tries, and the amounts are not round figures, as here shown). 

Works Ledger 
January, 1916 Residuum Expense 



Total 


Jour. 


Mfg. 


Rooms 


Rooms 


Dept. 


Dept. 


All 




Entry 


Acct. 


7-16 


22-31 


L 


(Several Cols.) 


Other 




No. 












Rooms 


18.700 


01 


1400 






4000 


8000 


5300 


9,900 


OS 


100 


soo 




1000 


800 


800 


20 


36 






20 








500 


55 




500 










16,3S0 




1300 


soo 


go 


SOOO 


7200 


4S00 



The figures italicized above are written in red ink. Black 
figures are debits and red figures credits to Residuum, 
except the red ink figures at the bottom, which are the net 
credits (difference between black and red figures) of the 
accounts named at the head of the columns. The red ink 
total, S16,320, is the debit balance of Residuum which 
remains to be distributed by a journal entry to Manufac- 
turing Acct. (a control account) and to its Class subdivisions, 
A to L, which entry will close Residuum Account for the 
month, leaving no balance. 

The distribution is made on the following principle, the 
Residuum of Mfg. Acct. ($1300) is apportioned to the Classes 
in proportion to the ratio which the productive labor charged 
to these classes bears to the total productive labor, and the 
residuum of the rooms and departments is apportioned to 
the classes in the ratio which the productive labor charged 
to the several classes from the rooms and departments bears 
to the total productive in these rooms and departments, 
with the exception of the balance of the last colunm, "All 
Other Rooms," including Power Plant and other rooms in 
which little of no productive labor is done, which is treated 
in the same way as Mfg. Acct. 

For example, if the total productive labor charged from 
the several departments and rooms to the classes is $100,000 
for the month a statement is made showing its subdivisions 
as below, using round figures in thousands of dollars for 
convenience. 





A 


B 


C 


D 


E 


F 


G 


H 


Productive Labor 


Thousands of Dollars 


Total 100 
Mfg. Accounts. 10 
Rooms 7-16 20 
Rooms 22-31 20 
Dept. L 15 
Other Depts. 20 
Other Rooms 15 


10 
1 

4 

2 
2 

I 


15 

10 

4 
1 


20 
3 

7 

6 

4 


10 

6 
3 


5 

2 
2 
1 


20 

4 
1 
4 
3 

4 
4 


10 

5 

4 
1 


10 

2 
3 

4 





Total 




DXBTBIBUnON 


OF Residuum 




A 


B 


C 


D 


E 


F 


G 


Heto. 


Mfg. accounts 


1,300 


130 




390 






520 




260 


Rooms 7-16 


300 


50 




190 






50 


50 


50 


Rooms 22-31 


20 




10 




6 




4 






Dept. L 


3.000 


400 


800 






400 


600 


800 




Other Depts. 


17.200 


720 


360 


2160 


1080 


720 


1440 


360 


360 


Other Rooms 


4.500 


300 




1200 


300 


300 


1200 




1200 




16,320 


1600 


1170 


3850 


1386 


1420 


3814 


1210 


1870 



The residuums are now to be divided in the proportions 
of the figures up the several columns A to L to the figures 
in the total columns, as in the statement below. 



A journal entry is now made and posted crediting Re- 
siduum $16,320 and charging the several classes the figures 
at the foot of the respective columns. 

After all the posting for the first month of the year is 
done a trial balance taken from the Works Ledger would 
show a credit balance of Private Ledger account which would 
be the sum of the inventory of raw material and supplies 
Jan. 1, of the invoices of material received during the month, 
which have been certified to the Company for payment, 
and of the sums received from the Company for the pay 
rolls. All the other accounts would have debit balances, 
representing the charges made to the several productive 
class accounts, to betterments, special orders and adjust- 
ments. The debit balances of the class accounts represent 
all the charges made against these accounts during the month 
for material, supplies, labor and expense, whether the work 
done exists at the end of the month in the shape of work 
in process, finished goods in the warehouse, or goods shipped. 
In the succeeding months the debit balances of these accounts 
and the credit balance of Private Ledger increase, no counter 
entries for goods shipped being made, and at the end of the 
year the balances are a summation of all the work done 
during the year. The Works Ledger has nothing to do with 
commercial accounts, but is concerned only with total 
monthly cost of production by classes. 

The three departments of Accounting, Statistics and 
Costs are in this factory kept separate. The Accounting 
department furnishes, as above stated, the total costs by 
classes. The Statistics department furnishes records of men, 
hours, materials, etc. The Cost department furnishes unit 
costs of product, piece rates, etc. 

Determination of Costs. In the factory referred to costs 
are determined by a special investigat on of each piece and 
of each operation. The raw material for a piece or a given 
number of pieces of the same kind is weighed and it is priced 
(for " Recorded Cost ") at the average price of a five-year 
period. The product of the weight and price per pound less 
the value, at a standard price, of the scrap returned from the 
operations is recorded as the Cost of Material. On small 
work it is conunonly figured per 100 pieces. The direct labor 
cost is determined by a time study of each operation, which is 
made for the purpose of fixing piece rates. 

The sum of the costs of material and of direct labor so 
found is called the Prime Cost. The overhead expense added 
is a percentage on direct labor which has been determined for 



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186 



BOOKKEEPING AND COST ACCOUNTING 



the department or rooms in which the operation is done, or 
for the Class of Product. 

A " Part Cost " card is made for each part or piece. 

The material is entered in the first line below the headings 
and the several operations in their regular sequence below. 
If the department or room overhead is used it is figured sep- 
arately for each operation, but if Class overhead is used all the 
direct labor cost of the several operations is added together 
and the percentage applied to the sum. 

It is recognized that this method of figuring overhead is not 
as accurate as the machine-rate method, but, as the articles 
made are generally of Ught weight, and the machines used in a 
given department or room, or for a given class, do not vary 
greatly in first cost or in cost of upkeep, it is considered that 
the error of the method is not great enough to warrant the 
use of a more accurate method which would cost more for 
clerical work. 

The amount of the standard percentages to be added for 
overhead in the several classes or departments is determined 
by the Accounting Department from the statistics of one or 
more previous years. 

The sum of the standard costs of material, labor and over- 
head is what is known as the " Recorded Cost," (Shop Cost) 
which is entered on the " Part Cost " card for permanent 
use. When a '' Present Cost " of any article or part is needed 
for any purpose, the Part Cost card is taken from the file and 
its record is copied on a Present Cost Estimate, on which there 
is added to or subtracted from the recorded or standard 
figures any " Adjustments " or changes that have taken place 
in prices of material or labor or in overhead ratio, the amounts 
of such changes being determined by the Accounting De- 
partment and furnished by it to the Cost Department 
monthly. 



When the annual inventory is taken the values are figured 
on the " Recorded Cost " basis, and are then adjusted to 
correspond with the present costs. 

The standard overhead percentage, or ratio, added to the 
direct labor cost is based on statistics of indirect labor and 
other actual expenses, not including depreciation, but in. 
figuring present costs adjustments are made for depreciation 
and for " slippage," which latter term in defined as follows: 
Slippage is the difference between estimated labor costs as 
shown on the unit cost cards and actual labor costs. Exam- 
ple: A unit cost card shoWs an operation covered by a piece 
rate based on manufacturing in large quantities. The opera- 
tion is performed on a small quantity at daj'^ work rates, 
which results in a labor cost in excess of that shown on the 
unit-cost card. The difference in cost is termed slippage and 
is included in shop overhead expenses. 

An allowance for spoiled work, determined for each class 
or department from statistics of previous years, is also made 
in figuring the overhead cost. 

Because of the clerical labor involved in rewriting all the 
cost cards at one time, changes in actual cost of labor, due to 
a general increase of wages are not made on the Recorded 
Cost cards except by stamping on them with a rubber 
stamp. (For example, Dir. Labor Inc. 5 per cent, Jan. 1, 
1915.) 

Group Cost Cards. — Group costs are made by adding the 
separate totals of the Part Cost cards to the labor and over- 
head cost of assembling the group. 

Cost of Finished Product Cards are made up from the 
Part and Group cards and from the labor and overhead cost 
of assembling and finishing the cost of the completed article. 
A total is made showing the cost in a '' no finish " condition, 
and the cost of finishing is then added. 



IlFil 
Comp'd bx_ 


Date 






















DaaJ 
Uat 


gn 




Cbeck'd bx_ 




COST OF FINISHED PRODUCT 






Rerla'd by_ 
Artldtt 


Date 




Baaed on 
OuantltlM of 


t 


Pam 




C.f . M« 


Changea 




Coat per Anth'n No. 




SUMMARY 


FINISHES 




Original 


ReviaMl 


RerlaMl 


Labor 
OvarhMd 
^ Material 








Total No Fin. 
Finiah 




Total No Pin. 
PInlab 




Total No Fin. 
Finiah 




Total 




Total 




Total 




Add Finbh 


Total No Fiaiab 








TotKlNoFln. 
Flalah 




Total No Fin. 
Flnlab 




Totel No Fin. 
Finiah 






Total Coat 








Total 




Total 




Total 




Part or 
Group Noa. 


BaMxIption 


Waljhtt^ 


Dapt. 


Houn 


Orer 
Sjrm. 


ha^d 
Rata 


Labor 


Ovcrbcad 


Material 


Labor 


Orarhawl 


Material 




(*• nUed «»e«, 4 per tneh) 
Monoaur§HU<ireatrL) 

























Form HF8. Cost op Finished Product. 



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HARDWARE FACTORY AND MACHINE-SHOP ACCOUNTS 



187 



The unit costs of products that are regularly made and 
for which piece rates have already been established are found 
by examination of job and material tickets for operations, 
parts, groups, and assembled product, and adding the de- 
partment or class overhead computed by the accounting 
department. For new products time studies are made and 
the first orders are watched in their progress through the 
shop to obtain actual labor and material costs. For esti- 



mates on a product not yet made, the product is analyzed 
into its component parts for weights of raw material and 
of finished piece, and the labor of making and assembling 
together with the overhead, are estimated on the basis of 
recorded costs of similar products, and a figure is added 
for a factor of safety. 

A sample of an estimate of cost is given below. 

Records of actual cost are kept on cards which are filed 



«" ESTIMATE OF COST 




Article L^^ot4/teAt.(m/ NStUS: 


Coat par 


'?^J 11 


Tsr- 






Finish 


/IX/0 \\A 


^'L/0 




^LtU- CB^i^^L^i^ 


Labor 


¥.¥93 1 


i^ 00 




Ov'^hMd 


^A,^Q3Y 


3 000 




Request from Order No. Class y7 


Material 


/r 3/0 


7.000 




./ . 


'^<^.^' 


:^6.%9b 


f¥.^0 


- 


Quantity Basis Compiled by Date '^/^5//^ 


.^.^. 


2 9^ '• 


2./9 


/ 7 


'ov^t46r>^M 


) 






Patterns. Tools & Drawin«s recorded 


^aZ^^ 


T9.%1 


fk79 




Description 

/>£R too 


Wgtt.. Prices 
•nd Cut Not. 


Hours 


Dept 


Overhead 




Overhead 


Material 


Total 


Syfn.| Rata 














w \ 












1 


PLATE 


^^iL -^ 


0^ 




[ 
















i 


JLAju/f- S/iyixd6/ 


^1^' J 


"TF' 








V6'0|0 j 






ISO 


10 








e-^ ■ -g 












1 















RE'INFORCING COLL AR 


jfA^H/ 












i 












^d^t^.dXul' 


Si. 1%/ 0^06 










/ 


<o 






I 


ro 


































THIMBLE 


,,^^ ^ 


























xUujU- ^2/Lii.d^ 


^^e-, ^aj 


' 








rLo'o\o 1 






sr 


60 








J-^^i^O C-'/J 




































. 


67 


50 






no 


ho 






j^-k^cUuch S^ cuy. . /-'On^cuDiA.orU 




















6r 


50 


































Jl^yt^cAX^CUU/ Uon/ C^oa/^O^ 7'yvtUlUcUy 




















103 


7<? 


































Q:>oSxy\^ ayyui/^yr*^eJl^t>ii^CL6^Aj^^ 












^0 


00 






7 


00 


































r'io ^^ cin^eA/ yon^cAJt/cutt/ a>?^ ^«^«i.^-&ti/ 












3 


2i0 














/ Ir 












*/3 


•Jj'o 














i^% Z^ c>ov^Ay ^^rjy^yuA^ /"q.-^ynMyo/. J 












,\^.3 1 






























1 












C^^tsS^ — /^ha^^ry^ a>o^^ ^yn^fxXJ^lAAzJ'' 












LfU 


?j 






n^ 


1 








. 


























. 





























(JHtjey -i^^ottAAAJ^ yU^^UcO oAJty ^oUct'Uru^ ) 


























\ ^ ^ ff' y 




























Qyiy MJU/^Om^CoAt yl^lcyn, g/ixrl^ A4J<AXiJxi 


crt-yrUtodL a 


'^^ AAAA 


<l, 






















-hxr oJlor\A/-otAl/CJly ''C^/Cn^y?t,6LeiJU J^ty\/ ^^.^Ma^ 


%^lJu.A.ea. 


<<m/ Jt4 


tU- 


















I 




X:A^ yO^cAAsuftf vaJUO/ X^ ^^^ J^yru<?U£^. 












u 


—^ 


.-, — 









Form HF9. Estimate op Cost. 



for convenient reference. Small cards giving total cost of an 
article at different dates and with different finishes are also 
kept. 

The system described appears to be fairly satisfactory for 
a large factory that makes a great variety of goods. To 
carry it on with any degree of accuracy requires the division 
of the product into classes, that each class receives its proper 
apportionment of burden, and that careful records and 
statistics are kept of base or normal costs as established in 
a year of normal business or deduced from average 
results of a number of years, and of the variations in 



wages, in cost of material and supplies, and in selling prices or 
discounts. 

Original and Revised Costs 

A revision of the Cost of Finished Product is required 
when new schedules of raw material prices and overhead 
expenses are issued from the Treasurer's office (usually at 
yearly intervals, but monthly when market prices are rap- 
idly fluctuating), and also when changes of method of man- 
ufacture are reported by the planning room. Orders for 



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188 



BOOKKEEPING AND COST ACCOUNTING 



changes of method are referred to the Cost Bureau if the 
changes affect the cost of product. 

Estimates on Special Work; Cancellation and Changes 
. of Orders; Spoiled Work; Defective Returned Goods 

In making estimates for special work outside of the regular 
line of products special charges are made for each setting 
up of machines, to cover office work on each order. The 
Cost Bureau estimates the office time required to make 
cancellations and changes of orders, and makes a fixed 
charge per hour for clerical work. When any work is spoiled 
tickets are made out by the foreman, and the Receiving 
Room makes out tickets for all defective work returned. 
These tickets are sent to the Cost Bureau and to the Ac- 
counting Bureau for record, and are used to furnish data for 
modifications of estimated costs of finished articles and 
for proper charges to the several classes of product. 

Annual Inventory 

Inventory cards are issued to the foreman the day before 
beginning to take the inventory. The cards are serially 
numbered, and verified when returned to see that none are 
missing. They are priced by the Cost Bureau on the "re- 
corded cost" basis, for material and labor, and the totals 
are then modified by the latest changes in "revised costs." 
Expense ratios for different classes of product are furnished 
by the Accounting Bureau to the Cost Bureau. The expense 
ratio is applied on the productive-labor cost. 

Method of Charging Supplies Issued by Stores 

A fine example of the use of modem labor-saving methods 
in the accounting methods of this factory is shown in the 
use of a tabulating machine card which serves the combined 
purpose of a requisition on Stores for material, a bill from 
the stores for the material delivered and a tabulating card 
which when passed through the tabulating machine with 
other cards will give the monthly total of the kind of material 
as to quantity and price, the total charge for supplies to the 
charge account and its subdivisions and the total credit to 
the Stores. The punched figures on one such card and their 
meaning are as follows: 0016, branch of the power depart- 
ment; 53, the numerical symbol for U, meaning Power 
Plant; 0131, the kind of material; 70, room No.; 0010, 
10 lbs.; Lb., 0020, 20 cents; 65, symbol for SE, a credit 
supply account. 

By different settings of the tabulating machine any com- 
bination of groups of two or more items may be sorted and 
their monthly totals obtained, for example the total amount 
of supplies delivered by store room SE to the Power Plant, 
or the total weight and price of asbestos cement delivered 
by the storeroom. 

Statistical Reports 

The department of Statistics prepares from the large 
statistical sheets of distribution of labor, material and 
expense, and from the Works Ledger such monthly and an- 
nual statistics as are desired by the officers and directors 



of the Company for their information. They are usually 
tabulated on 6X9 in. cards, ruled with columns for months. 
One of these cards gives the statistics of a single class of 
product or a single account of any kind, by months, for 
several years. A line at the bottom of the card gives the 
monthly average for each year. 

A monthly wage report is made on a card ruled with col- 
umns for months and side heads as below: 



imr 141 

MONTHLY WAGES REPORT 
14 N« 


1 




1 


OPERATING HRS. 


Jan. 


Feb. 




Total No.ofOp.Hn. 








Total W«sM per O.H. 








PI«»Work 








Day Work 








Iiidli«ct WagM " 












j 








1 




MEN. HOURS 




A^ 




Total No.of Men Hn. 




•si 




Avsrase No. of Man 




?3 




Total Wa«aa par MJL 




^2 




Pi«caWoricarap«rM.H. 








DayWorkara " - 




T^ 




ladiract Wasaa •' •• 




•il 








8 

Ih 








^ 




Rado IndlracC Wasaa toj 




§ 1 


Total Wasaa 








RadoPlecatoDlr«<t 
















Total Wacaa $ 


- J 

















Form HF14. Monthly Wages Report (9X6 in.). 

Statistics of wages and salaries are also kept by weeks 
and by rooms, and the men-hours are analyzed by rooms, 
productive and non-productive work. Purchases and in- 
ventories of raw material and of supplies are reported on 
monthly by classes or kinds, and betterments are classified 
and tabulated. Reports are made of the expenditures for 
fuel, labor, supplies and repairs of the power plant, of the 
daily and monthly consumption of metal and fuel in the 
foundries and their product in castings and scrap, also 
of the weight of sheet metal used and of product made in 
the press shop. 

Labor Turnover 

One interesting bit of statistics is furnished by the Em- 
ployment Bureau. It is called the Labor Turnover, that is 
the number of new men employed each month to take the 
place of those who have left or been discharged, and the 
percentage this turnover bears to the total laboring force. 
Records are kept for each department or group of rooms. 
Although it does not appear in the accounts this labor 
turnover has an unportant influence on costs of manufac- 
ture, for every time a new man is hired it costs something 
to "break him in,'' and until his output is equal to that of 
the man who left, the machinery is not being operated with 
its usual efficiency. 



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HARDWARE FACTORY AND MACHINE-SHOP ACCOUNTS 



189 



Monthly Estimate of Increase or Decrease of Inventory, 
and Profits or Loss 

A monthly estimate is made by classes of products on the 
assumption that the ratio (found from the statistics of a 
preceding year) between the manufacturing cost (material, 
labor and factory expense) of the goods sold of a given class 
and the sales of that class remains practically constant for 
each month of the current year. Thus, if the sales of a cer- 
tain class of goods amounted in 1915 to $1,000,000 and the 
factory cost of these goods was $700,000 then the ratio is 
O.70. If the sales of this class in a certain month in 1916 
amount to $100,000 then it is assumed that the goods sold 
cost 0.70 of $100,000 or $70,000. 

If during the same month the total charges for manu- 
facturing this class of goods is $90,000, the estimated in- 
crease of irwentory is .found by subtracting $70,000 from 
$90,000, giving $20,000. If the charges are only $60,000 
the decrease of inventory is $70,000-$60,000= $10,000. 



If the sales of Class A in March, 1916 amount to 
and the estimated cost at 70 per cent of sales is 

The di£ference is called " gross profit '* 

If the selling and administrative expense, and the 
extraordinary expenses of every nature, chargeable 
to the class sales total of $100,000 amount to 

The estimated net profit for the month is 



100,000 
70,000 

30,000 



20,000 



10.000 



Adjustments in these figures are necessary if there have 
been changes in prices of materials and in ratios of shop 
expenses to direct labor. The amount of these adjustments 
will be found from the Material Adjustment Account in 
the Works Ledger and from a memorandum Expense Ad- 
justment Account kept outside of the Ledger. 

The adjustment accounts represent the difference be- 
tween the actual expenditures in the current year for material 
and shop expense over the established prices of materials 
and expense ratios on which shop costs (unit cost cards) 
are based and the inventory is computed. 

An actual inventory is taken at the end of each year, the 
prices being taken from "unit cost cards." The prices of ma- 
terial on these cards are average prices for a five-year period. 

The labor cost on these cards is taken from lists of es- 
tablished piece rates. 

The shop expense ratios on these cards (ratios to direct 
labor) are based on the actual operations of a certain year. 

Having taken the inventory and priced it on the unit 
cost card basis its value and the cost of sales for the year 
are to be adjusted in order to get values to be entered in the 
private ledger. 

Method of Making a Monthly Estimate of Increase of 
Inventory and of Profit and Loss without a Monthly 
Inventory. 

When a factory makes hundreds or thousands of different 
articles the cost of clerical work for making and tabulating 
an inventory oftener than once a year, even when a perpetual 
card inventory is kept in the stores and the warehouse, 
becomes prohibitory. The method described below of making 
a monthly estimate of increase (or decrease) of inventory 



and a monthly profit and loss estimate, or a modification 
of it, is in use in some large factories. 

The total product of the factory is divided into a limitiBd 
number of classes, say six to twelve, and the monthly totals 
of charges to Manufacturing Account, including Material, 
Direct Labor and Burden, are apportioned to the same 
classes. The monthly total of sales is likewise divided, as 
are also the selling and administrative expense connected 
with the sales department, together with a margin allowed 
for minimum profit, the sum of these three being designated 
by the abbreviation SAP below. The sales of any given 
class minus S A P is called the "Cost of Sales" of that class. 

From the statistics of each month an estimate is made 
for each class, charging it with the total expenditure for 
manufacturing and crediting it with the cost of sales. If 
the former is greater, the excess is taken as the increase of 
inventory, provided there has been no change in selling 
price or in the cost of material labor and burden. 

Suppose the total charges against Mfg. Acct. for a given 
class in a certain month is $1000, that the sales of that 
class amount to $1200 with S A P=$300, leaving the cost 
of sales $900; then the increase of inventory is $1000— 
$900 =$100. 

To illustrate this method we will take an example, using 
small figures for convenience. Assume that the statistics 
of production and sale for a certain class in a normal year 
show an average production and sale of 1000 articles per 
month, a cost for labor $250; for' expense, $350; for ma- 
terial $100, total factory cost $700. Sales $1000, leaving 
for expenses and normal profit, SAP, $300. We will for the 
present assume that for the first three months of the following 
year complete statistics of the number of articles made and 
sold each month are available and that an inventory is taken 
at the end of each month, the figures being as follows: 

Inventory Jan. 1 . 2000 piecea at . 70 » $ 1 400 





Jan. 


Feb. 


Mar. 


Total 


Production, piecea 


1200 


600 


1200 


3000 


Cost of Production: 










Direct Labor 


$330 


$180 


$360 


$870 


Expense 


360 


300 


360 


1020 


Material 


144 


72 


144 


360 


Total 


834 


552 


864 


2250 


Cost per piece 


$0,695 


0.92 


0.72 




Advance in wage rates per cent 


10 


20 


20 above normal 


Advance in price of material, per 








cent 


20 


20 


20 above normal 


Relative cost for expense, per piece 


f 


V 


f 



(As compared with normal expense cost of 35 cents per piece. The expense 
per piece in February is high on account of the small product.) 





Jan. 


Feb. 


Mar. 


Total 


Sales, pieces 

Advance in selling price, per cent 

Sales price 

SAP 

Apparent Net Cost of Sales 


1500 

10 

$1650 

400 

1250 


1000 

15 

$1150 

300 

850 


1000 
20 
$1200 
320 
880 


3500 

$4000 
1020 
2980 



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190 



BOOKKEEPING AND COST ACCOUNTING 



The SAP includes the actual costs of selling and admin- 
istration plus the normal minimum profit from the previous 
year's statistics; with these data it is now required to find 
the increase or decrease of inventory (pieces and value) 
at the end of each month, and the profit (or loss) as compared 
with the normal profit. 

The result may be tabulated as follows: 





Jan. 


Feb. 


Mar. 


Pieces made 
Pieces sold 


1200 
1500 


600 
1000 


1200 
1000 


Inventory 

Inventory at end of month 


Dec. 300 
1700 


Dec. 400 
1300 


Inc. 200 
1500 







Sales Account 






Net 


Charges 




Credits SAP Cost 




Pieces 






Pieces 








Inven- 
















tory 


2000 @0.70 


$1400 












Jan. 


1200 @ 0.695 


834 


Jan. 


1500 @ 1.10 


$1650 


$400 


$1250 


Feb. 


600 @0.92 


552 


Feb. 


1000 @ 1.15 


1150 


300 


850 


Mar. 


1200 @0.72 
5000 


864 


Mar. 


1000 @ 1.20 
3500 


1200 


320 


880 




3650 


4000 


1020 


2980 








Balance 


1500 


Bal.of 


Acct. 


670 






'1 
1 


5000 




3650 



Product 



Cost of Sales 



Net Cost Profit 





Pieces 




Pieces 










Inven- 


2000 


Jan. 


1500 @0.70 


$1050 


$1050 


$1250 


$200 


tory 




Feb. 


/500 @0.70 


350 












500 @ 0.695 


347.50 


697.50 


850 


152.50 


Jan. 


1200 




500 @ 0.695 


347.50 












Mar. 


^ 200 ©0.695 
[300 ©0.92 


139 
276 


762.50 


880 


117.50 


Feb. 


600 
















3500 
















2510 


2510 


2980 


470 


Mar. 


1200 




Inventory: 
300 ©0.92 
1200 ©0.72 


276 
















864 


1140 1 






5000 1 

1 






3650 


3650 ; 



The balance of Sales Account being $670, and the 
inventory $1140, the difference, $470, is the profit, as in 
the last column of the table. 

The profits are over and above the normal or minimum 
estimated profit P of the S A P as above defined. 

It should be observed that the apparent value of the 
inventory and of the profit are both enhanced on account 
of including in the inventory value 300 pieces at $0.92 made 
in February when the manufacturing expense was excessive 
on account of the decrease in factory production which might 
have been caused by an accident or by a strike. If these 
300 pieces were valued at $0.72, the cost in March, then the 
inventory value would be 1500 pieces at $0.72 =$1080, or 
$60 less than the recorded value, and this $60 would be sub- 
tracted from the $470 profit, makmg it $410. 

Now suppose that we have no records of the number of 



pieces made and sold, nor of the inventory each month, 
and it is desired to obtain an estimate of the increase or 
decrease of the inventory and a profit and loss estimate at 
the end of each month. The data of production costs are 
as follows: 





Jan. 


Feb. 


Mar. 


Direct Labor 
Expense 
Material 


$330 
360 
144 


$180 

300 

72 


$360 
360 

144 


Advance in wages, per cent 
Advance in material, per cent 
Expense, relative to normal product 


834 
10 
20 

? 


552 
20 
20 


864 

20 

20 

? 



We first reduce the actual costs to their equivalent normal 
costs by dividing them by percentage adjustment factors, 
as below. 



: Jan. 


Feb. 


Mar. 


330+1.10 


-300 


180-4-1.20-150 


360+1.20=300 


360-S-* 


<»420 


300-fJ^ -210 


360 +? =420 


144-!- 1.20 


»120 


72-F1.20- 60 


144 + 1.20-120 




840 


420 


840 


Actual cost as 








above 


834 


552 


864 


Decrease 


6 


Increase 132 


Increase 24 



We then in like manner reduce the receipts from sales 
to their equivalent base prices, by dividing them by factors 
for advance in selling prices. 





Jan. 


Feb. 


Mar. 


Total 


Receipts from sales 
Divide by 

Equivalent normal sales 
Less normal SAP, 30% 


SI 650 

1.10 

SI500 

450 


SI 150 

1.15 

SIOOO 

300 


SI200 

1.20 

SIOOO 

300 


S4000 

S350O 
1050 


Normal Salps Cost 
Normal Mfg. Cost 


1050 
840 


700 
420 


700 
840 


2450 
2100 


Inc. Dec. of Inventory: 

Add original Inventory, 

$1400 
Net receipts from sales 
Less normal Sales Cost 


Dec. 210 

1190 
1250 
1050 


Dec. 280 

910 
850 
700 


Inc. 140 

1050 
880 
700 


Dec. 350 

2980 
2450 


Apparent profit on sales 
Apparent loss on Mfg. 
Costs 


200 
-6 


150 
132 


180 
24 


530 
150 


Apparent net profit 


206 


18 


156 


380 



This apparent profit is based on the inventory being taken 
at the normal value, $1050 at the end of March, making 
no allowance for increased costs of production. A statement 
may be made, however, which will show the inventory values 
and the calculated profits based on advanced inventory 
values as follows: 



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HARDWARE FACTORY AND MACHINE-SHOP ACCOUNTS 



191 



1 


Normal 


Actual 


Profit 


Loss 


Inventory 


$1400 


Sold 91050 for 


$1250 


S200 








Made 840 for 


834 


6 




Balance 


350 
640 


Sold 350 \ _^. 
Sold 350/ ^~'°^ 


850 


150 








Made 420 for 


552 




132 


Balance 


490 
420 


Sold 490 ) 

Sold 210/ ^^^^^ 


880 


180 








Made 840 


864 




24 




Normal 


Cost 




536 


156 


Inventory 


210 
840 


276 
864 


Less 


156 








380 
90 






1050 


1140 Increase of value 
Profit, as before 








470 





Which profit may be reduced, by a revaluation of the inventory on the 
basis of the March manufacturing costs, increasing the normal value, $ 1 050, 
in the ratio ffo making it $1080, or $60 less than the recorded value, and 
reducing the profit by the same amount, making it $410. 

In this manner we reach the same result that was reached 
on the assumption that a perpetual inventory was kept. 
In the example it was assumed at the beginning that the in- 
ventory was of 2000 pieces each at 70 cents, totalling $1400, 
and that the total production was all of the same kind of 
pieces, but the revised example, in which the number of 
pieces is left out of the calculation, would have been just 
the same if the pieces were of a thousand or more different 
kinds or sizes, but of one general class, such as light hardware. 

Some of the other forms used in this factory are shown 
below. 



larifll S.M.10K 

REQUISITION FOR PARTS 


ACCT. 


Date 




Part No. 


Room No. 


Finiah 


Order No. 


Meul 


Quantity Ordered 


UstNo. 


Article 








Ec Qvan. In Lot Move to 


Promise | 


Lot No. 


Date 
Wanted 


Lot No. 


Date 
Wanted 


Lot No. 


" Date 
Wanted 


Lot No. 


Date 

Wanted 




(SUn«9) 










' 




















Date 


SSp% 


Date 


StA^ 


Date 


Qnan. 
Shlp'd 


Date 


Shi^d 




(4 lines) 












































DeteRec'd 


Ac< 

Par 
"o«4 


t- 


Fr 








) 


tl 


Ja 


MOVETC 








■M«. 


UmNo. 

•ad 
Article 


Quantity 


Xnirs 






Section 


Bint 








Parte have this day been 
la Case No. Date 


received 

Part No. 


AftlcU 


Order No. 


From 


List No. 


Slncd Case Attendant 


Quantity 


Route Clerfc Check 


Stock Record Oefk 


Comp 
Lotl 


letes 
So, 


Indicate by an X | 














Rough 
Material 


Worked 
Matertal 



For Bronze Castings 


{8lM€s X tin.) 

Charge Acct, 

Order 


TCo. 




List No. 


Pat- No. 


Part 




Fhift nate 


Oiiantity 





Form HFl 1. Requisition for Bronze Castings (5X3 in.). 



(8Ue 3 X sin.) 

Clock No. DafA 


Name 




Date 


No. in Flasks 


No. of Flasks 


Hours 


to lines, s per 


inch 















Back of Form HFll. 



flFTi] (8iMe8Hx Hin.) 

RETURNED GOODS REPORT 

Clfim Date 191 


Quantity 


UstNo. 


DESCRIPTION 


Finish 


DUPO... 


(Mlin 


f« iper 


neh) 

















Form HF12. Returned Goods Report (8§X11 in.). 



ISLHJ Operation and Route Record, ciaw- 

Aitide Part No. 



Metal for 
HH Pieces 



Operation 1 

No. I 



(H line** per itch) 



Operations 



Economic 
Quantity 



Boon Opir'i 



Kuabvo^ Dally Listof Artidefl 
Output I used lot 



Form HF13. Operation and Route Record (6X4 in.). 



(8tte4\€xHn.) 
•5^ TICKLER 


Room No. 


Operation No. 


Order No. 








Metal 


Finish 


Due Date 








List No. 


Quantity Ordered 


Promise 








Description 




Room 


Due Date 


Room 


Due Date 


Room 


Due Dste 


(a llnea i 


Mperineh) 












-■ 



































FormHFIO. Requisition for Parts (4^X7} in.). 



FormHF15. Tickler (4}X4in.). 



Digitized by 



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192 



BOOKKEEPING AND COST ACCOUNTING 



iSixetxAin.) 



-Return to . 



Tickler Card 



^iMued. 



Date. 



(tltneaStMrttich) 



Sufcfect (i Un*$) 



Form HF16. Tickler (6X4 in.). 



A MACHINE-SHOP'S COST SYSTEM 
A certain machine-shop in Philadelphia, employing 
something less than 200 men, and manufacturing a few spe- 
cialties of its own, has a most elaborate cost system, the 
results of which are carried into the general books every 
month. It furnishes to its bookkeepers a set of typewritten 
instruction books. From these instruction books the fol- 
lowing notes have been taken, some of them in greatly 
abridged form. 

INCENTIVE 

The incentive for having a cost department is to establish 
a legal base for the selling price of an article and to determine 
the amount and source of profit for the different products. 



\mTi 














Pas* 

I>«t«_ 


^9. 


Name 


TIckatNo. 






Quantity 


LUt No. 


Aftide 


FlaUh 


Pric« 


Extsnsioa 


Total 


Size qf ticket 


•Kaf«/n. 
















19 ruled Itnei 
Punched for I 


ooae leaf t>ook 

















Form HF17. Details op Returned Goods Ticket. 



FUNDAMENTAL PRINCIPLES 

o. Make the cost of manufactured products made for 
sale during a certain period equal total expenditure of the 
business for the same period.* 

6. Connect the costs with the general bookkeeping. 

c. The books must keep perpetual inventories accounts 
of raw material on hand — totals only. 



Expense 



\i 



1. Direct Expense 
Construction 
Indirect or Overhead 



may be 
incurred 



"^H: 



Labor charges 
Material 
Misoell. charges 
(not a or 6) . 



d. Two classes of overhead expense: 

1. Shop Expense. That which attaches itself to the running 
of the machinery. 

2. General or Business Expense. That which is incurred by 
the Business or Administration and which has no con- 
nection with Manufacturing. 

6. Two compartments for filing cost data: 

1. For current period, not yet entered on the Cost 
Records. 

2. Finished data, entered on the Cost Records. 

WAGES RECORDS — TIME CARDS 

Time Cards (three kinds): 

The first card is issued when a job is given out. It con- 
tains blanks for a complete record of the job except as to 
the material used in it, which is entered in a "Stores Issue" 
card (Form P4). If the job Is not finished in one day, a Con- 
tinuation card is issued on each succeeding day. It does 
not contain as much information as the first card. The 
record on the successive continuation cards is transferred 
to the first card when the job is finished. (Forms PI, P2, P3.) 

* This "principle" is fundamentally a wrong one. See a criticism 
of it on page 200. 



0M.» 

In 
Out 


FIRST TIME CARD 
r\ AND BONUS RECORD 


Total C ||Op«nilloii 
WttgM ^ II Symbol 




MMh. 
Time 


Time 
Allowed 


Bonus 
Time 


Bonus 
Wacea 


No. 
Pes. 










$ 


Dr. 
No. 




If JobUNotFlnlthsd ni H If Job It Flntehod isTR Mach. 
ScncchOutThU SST * II j5cr«tehOutTlitoiy ^*^ No. 




Dmr 


















Total 


PI«CM 

Fintehed 




















Tim* 
Unitt 




















Workman's 1 
Name ] 


Ma 
31 

:oi 


n'sNo. 
A 


I Have Chackad Thaaa EacriM and B«llcv« Tham To Ba < 
Hn. X Cost No. l^^aV 


tract. 


Routa 
Sheets 


Pay 
Sheet 


Cost 


Bonus Earned 
Bonus Not Earned 


1 








O.K. Defective | 



Form PL First Timb and Bonus Card 

Daily Entries on Pay Roll. The pay roll clerk sorts aU 
cards according to the men's numbers. 

Duplicate Earnings Record. Make out each man's earnings 
record, filling in the man's name, number and date, and the 
amount of time on day's work and on bonus work. The 
slip is laid aside to be completed later by listing the bonus 
jobs that are completed. The original goes to the man; 
the duplicate is kept for the shop record. (Form P5.) 

Sort time cards and bonus and inspection records accord- 
ding to the Charge Sjinbol "C." 

Enter time on the respective bonus records; check fin- 
ished work with Inspection Card and Order, Bonus earned 
and not earned. 

Day-work time cards are set aside until it is time to enter 
the value of labor and the Relative Cost Factor <explained 
later). 



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HARDWARE FACTORY AND MACHINE-SHOP ACCOUNTS 



193 





In 










Charsre Symbol 
ft 


Out 




\J 


Department DM 
Dav Rate 


If Job U Not Finished 
Scratch Out This £^ 


F 


If Job Is Finished 
SontchOntThlsS^* 


NF 










Opentioo 


II No o( 

PIMM 

nntab«l 


Mm's 

TllM 


MMblM 
TIOM 


Machine 
No. 










































Workman's Name 




Men's No. 1 
DM 1 












I Have Checked TheM Entrie 






Route 1 B^Ms 


Pay 

Sheet 


Coet Sheet 


Sheets 


R— 


lUa'a 


















] 
D.M.5 


BONUS 


5 wo 


RKM5J 





Form P2. Continuation Bonus Time Card 



IN 
OUT 











' 






DEPARTMENT D M 




IfJobUnotflnUhed 


F 


DAY Rj 


VTtt 


If Job to flnUhed 
Scratch oat thto tar 


NF 








Operation 


PlMM 

FlBkhad 


Xtt'a 

IfaM 


KMblM 
IfaM 


Hab 


(8 lines, 4 per in.) 












Workman's Na 






io. D M 












I have checked th 


eee entries and believe them to be correct! 

8%Mdty^WiMaormBifWHiiHttw 


Booto 


1^ 

MmI 


CatlSkmk 


Maa't 


MmUm 


-. -Wl 










DMl 


1 


JAY 


WOJ 


tCK J 


lote 



Form P3. Dat-work Time Card. (4iX4i in.) 

All time cards, except continuation cards which have been 
transferred to the first card or bonus record, must be given 
a labor value » man's hourly rate X No. of hours he has 
worked on the job. The value of the bonus card » cost of 
labor for the time worked+the amount allowed for bonus. 

The charge sjrmbol is a mnemonic symbol, made up of 
a combination of letters of the alphabet and numbers, which 
include the symbols of the class of work done (i. e., D, shop 
expense; X, part construction; Y, construction; P, M, G, 
T, R, L, etc., different classes of "worked materials" that 
are part of the finished products), together with the symbol 
of the piece or group of pieces upon which the work is done 
or the symbol of the particular kind of expense work. 

Relative Cost Factor or **Cost Number" This is a number 
entered on a list once a year for each machine, work-bench 
of assembling floor, obtained by computing the annual cost 



DM 11 

In 
Out 



8-27-15 



61.0 
fiS.1 



Department M 
Day Rate. __.3.qo__ 



Order Number 
DML 



Man's Time ^••i»I«j. 



Length of 
Belt 



o'fft" 



Belt Symbol 



19 10_ 

Maxfanom Tenalon W Minimum Tension^ 

Cleaned and Greesed grease used 

Dreaaed while in use „..^N?* preeaingused_,_._ 

Amount taken oat_._. ^Length put Ui.,_.^ 

Length of Splice. , Cement used^ 



Tenaio. in lbs. huilcted byj »•««" Tightening ,0.. 
•achapringbatonce -j^^^^ ^ 



Workman's Name 



Man's No. 1S8 



aL. J.M. R.S.P. 
BELT MAN'S RECORD 



DAY WORK '^^* 



iSixe^XxiHin,) 



Form P3a. Belt Man's Record 



Stores Symbol 

s 

Location 


Charge to Order No. 


Quantity 


Unit 


Total Weight 

Um. 


Unit Value 


Total.Value 










Month 


Dey 


Year 






191 


Plaaae laaoe abov 


s to 


1 


A* M 


■ A 


o. 


.191 


■inadlijIIutoWbM 


■naaMl«^ 




Entered In 


Bk>.d1vO«.StaMk«p« 


Bal- 
ance 


D.V. 


Coet 














STORES ISSUE 



Form P4. Stores Issue Card 



M.m 


Ma. ffV.*. 1 


YOUR TIME AND EARNINGS WF.RR AS TOLLO WS ON 


BONUS JOBS PINISHBD 


Bonus 
Jfade 


Symbol 


Allowed 


Taken 


Saved 


Loet 


(Nine ruled Unea) 











































■ 1 1 





1 1 


1 


"1 


Actual Tbne Worked 


TOTAL-RARNINGS 


TOTAL 




O.DvW«rk 


OBBoBMWotk 












Signed 



Form P5. Workman's Time and Earnings 



Digitized by 



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194 



BOOKKEEPING AND COST ACCOUNTING 



(indirect expense, not including wages of the operator) of 
maintaining the machine in operation, viz.: the sum of the 
rental value of the space occupied and its proportional 
oost for power, light, heat, insurance, taxes, interest, repairs, 
depreciation, superintendence, cleaning, watchman, small 
tools, stores, clerical expense connected with the shop, 
etc., and dividing this annual cost by 3000 hours if the ma^ 
chine runs days only or by 6000 hours if it runs day and 
night. This "CJost Number" is not the actual cost per hour 
during the time the machine actually runs, but a relative 
figure which is to be multiplied by an expense rate ("DM" 
rate, explained below) to obtain the hourly machine cost. 

In listing the relative cost numbers for the several ma- 
chines select the nearest even figures, neglecting decimals. 
From 10 to 50 cents the cost numbers should increase by 
2 cent jumps, and from 50 cents upward by 4-cent jumps. 

It is not necessary to have a Relative Cost Factor on 
any job which does not have to bear shop expense. On all 
jobs charged to indirect expense or overhead charges the 
R.C.F. is not worked out. To make use of this factor in 
such cases would be charging expense to expense, which is 
a point in cost-keeping that should be guarded against.* 

Jobs charged to Construction should have a R.C.F. Jobs 
charged to Part Construction, or work that adds partly to 
the permanent value of the plant and partly to shop ex- 
pense (by reason of quick depreciation) do not have a R.C.F. 
because the amount of depreciation is charged to shop expense.f 

Shop Expense Rate ("DM rate"). The total monthly 
shop expense is distributed over the total productive work 
(worked materials and construction of machinery for the 
shop) in the following manner: The number of hours each 
machine runs during the month is multiplied by its relative 
cost number, and the sum of these products is divided into 
the total shop expense for the month. The quotient is the 
DM rate for the month. This is multiplied by the "Hours 
XCost Nos." obtained from the time cards for each job, the 
product being the amount of shop expense apportioned to 
the job. The sum of all these products should balance the 
total shop expense for the month. 

Example: 

Shop expense for month _ 6249.75 
Hours X cost numbers 2273.84 



= 2.7246, DM rate for month 



COST-COLLECTINO CAIU>S 

A cost card is made out for each job order or charge sym- 
bol that is in operation, giving each factor of the cost, viz.: 
wages, stores, and indirect or overhead expense, the latter 
including both shop expense and business expense. At the 
end of the month the cards are collected and the entries 

* It is not evident that charging expense to expense should be 
guarded against. Suppose a new crank-shaft is wanted for repairs 
of a machine tool. Its cost should include its proi)er share of the 
burden of the blacksmith shop, where it is forged, and of the machine 
shop, where it is finished. 

t This also seems to be wrong. If the carpenter shop makes a 
pattern to be used in the foundry, where it depreciates rapidly, the 
cost of the pattern should include its proper share of the burden of 
the carpenter shop. 



totaled. The totals are entered on a Detailed Cost Sheet of 
Worked Materials opposite the respective charge symbols 
and on an Expense Analysis Sheet. (Forms P6 and PI2.) 

EXPENSE DISTBIBirnON SHEtTF 

The cost-keeper sends to the bookkeeper a Distribution 
of Wages, Stores and Worked Material so that he may make 
the proper entries on the books. Total wages distributed = 
total monthly pay roll. He gets from the bookkeeper the 
record of all expenses not entered on the shop records. An 
Expense Distribution ^heet is made out to show how the 
shop and general or business expenses are apportioned to 
the construction and the worked materials accounts. Form 
P 15 is a sample of this sheet (abridged by omitting the col- 
umns for the several classes of worked materials). The 
figures given are random figures, in even dollars, and have 
no relation to the actual figures of any month. 

GENERAL BUSINESS EXPENSE 

Indirect expenses must, if we are to apportion them cor- 
rectly to the product manufactured, be split up into General 
Business Expense and Shop Expense. All expenses whether 
direct or indirect must ultimately be charged against the 
product. 

General Business Expense consists of such charges as 
would be necessary whether the concern made or bought 
the goods, such as advertising, salaries of officers, sales- 
men's salaries, traveling expenses, interest, legal expense, 
shipping, etc. 

These expenses are each month charged on to the pro- 
ductive work done during the month in proportion to the 
direct or productive wages charged to the productive jobs 
in progress during the month as shown by the cost sheets. 
The total amount of general business expense is divided 
by the total direct wages charged against the productive 
jobs. This gives a proportional number or rate ("B" rate). 
Multiplying the amount of wages on each job by this 
rate gives the amount of business expense to be charged 
against the job.* 

8T0BES 

No material is issued without a written order (See Form . 
P4, Stores Issue Card). The value of the material issued 
is entered on this order. The stores are classified as far 
as possible on the Balance of Stores sheets, or inventory 
cards, according to the purpose for which they are to be 
used, such as B, business expense; DM, shop expense; Y, 
construction of machines; P, L, G, etc., varies classes of 
products; SS, stores for sale. The stores issue cards are 
totaled for each class and a stores distribution sheet is sent 
to the bookkeeper at the end of the month. 

Orders are also written for Worked Material to be issued 
from Stores (Form P7), and credit tickets are made for 
imused or worked material returned to stores. (Forms P8, 
P9), 

* For a criticism of this method see page 200. 



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HARDWARE FACTORY AND MACfflNE-SHOP ACCOUNTS 



195 





SiMenKUln. 

S?SS'i5^!{S^{£Vili?' DETAIL COST SHEET OF WORKED MATERIALS 

thrte lines being dupltcaUd in 

in lower hair <inhe sheet, Deacription Symbol of Gott CUm. 


For Month of 








Shop ExpraMjUtc 










B ExpcnMlUte 
























DsttOfderto 


STARTED. __ _ FINISHED. _ 


ORDER NUMBER 




Check Hoc when order la flnUhcd 




Qnantlty cmlled for on Order 




Kind of worfc to be done 




Month In which worfc is done 








TOTALS 1 


Mach. hoars x cost number* 










































WAGES 










































B EXPENSE ' 










































SHOP EXPENSE 










































STORES 










































Worked Materlnl from Stores 




















































































TOTAL COST 














































_:: 1 


Rate of coet per unit 


1 


POSTED BY 


■■ - ' 


Check line when order is posted 













Form P6. Detail Cost Sheet op Worked Materials 



WORK OF the bookkeeper 

The bookkeeper receives the Stores Distribution sheet 
above mentioned and also, from the cost-keeper a similar 
sheet showing the Distribution of Labor. From these he 
makes journal and ledger entries crediting Stores and Ac- 
counts Payable (Pay Roll) and charging the several accounts, 
A, B, D, Y, P, M, G, etc., for the stores issued or work done. 
Advertising, Freight, Legal Expense, Traveling Expense, 



Worked Materials Tag No. 



Chanre to Order No. 



C 



Issued for 



QuaniitT Issued 



Total Weicht 



WORKED MATERIALS ISSUED 



\ Daaatfll] 
LNuMfor 



Number 
Pieces 



Drawing 

No. 



Machine 
No. 



Written 



DellTerMl 



Please lasnc abore | \ 



_BI|B><byll«atsrirb— W.lLiwiM— <. 



Tag 



Coat 

Acc't 



Worked Materials 
Bipwdbf 



described above have 



FoBH P7. Worked Materla^ls Issued 



Loss on Goods Shipped, No Charge, and Expense for Out- 
side Work charged against salable products, constitute 
miscellaneous charges. As these accounts are controlled 
by the Business Department, the bookkeeper knows the 
proper distribution and can make the debit and credit 
entries without help from the Cost Department. However, 
the cost-keeper has the detail cost of all products, and this 
detail must balance with the totals kept in the books. The 
bookkeeper sends to the cost-keeper a detail distribution 
of Miscellaneous Expense. 



AS 16 

Stores Tag No. 


» Credit Order No. 


Ouantlty 


Unit 


Total Weight 

Lbs. 


Total Value 


STORES CREDIT 


Month 


Day 


Year 






» 


Tlease Credit Work^faterials Order No 




.i»k (S lines) 




1 1 



and charge to_ 
Remarks 





Tag 


SIMM 


Oort 
BhMl 




hi4 0.K 
Bhop 

OflM 


Blf.«risspM(« 

vhoMlnn 
OoodatoMoM 


Signature of Storekeeper 

















Form P8. Stores Credit 



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196 



BOOKKEEPING AND COST ACCOUNTING 



Worked Materials Tag No. 



Qoantlty 



Ualt 



Cradh Order No» 



Total Walsht 
Lba. 



WORKED MATERIAL CREDIT 



Pay 



Plaaaa Credit Work Materials Order No.^ 



and Charge to— 



(S lines, Sprr inch ) 



The Balaacc of Stores Clerk wUl enter Value of Woiked Materlala on thia Card 



Oud O.Kl Big. 0f iBtpMlor 
wbodtUm 



Signature of Storekeeper 
or his Representative 



Work in Shop (or Worked 
Material in Process) 



Form P9. Worked Material Credit 

The Journal entries each month include the following: 
Stores to Accts. Payable, for materials purchased. 

To Stores, for purchased 
materials issued. To 
worked materials in 
Store for stored mate- 
rial on which work has 
been done. 

Mdse. Sales to Stores, for stores sold. 

Worked Material in Process to Accts. Payable, for Pay 
RoU. 

Miscellaneous Expense to Accts. Payable, for expenses 
other than those charged to stores or to work in shop. 

Worked Material in Process to Miscellaneous Expense. 

Stores to worked material in Process, for materials on 
which work has been done, whether finished or not, returned 
to the stores for safe-keeping. 

Worked Material in Stores to Worked Material in 
Process, for finished or partly finished product. (The fin- 
ished product, ready for shipment, might be charged to 
Warehouse or to Finished Product). 

Entries made once a month from a list of values of each 
product finished, made out by the cost-keeper. 

As part of the product is turned into the store room as 
Partly Finished or Stock Parts, it is necessary to transfer 
a certain amount of Worked Material back to the phop, 
therefore a distribution of total materials transferred to 
and form the stores has to be made each month. Both 
debits and credits of worked materials must be taken from 
the shop records. In recording credits the cost-keeper must 
note from which worked materials in Stores Account the 
goods were issued, and the total amount credited to Worked 
Material in Stores must equal the total debit to Worked 
Material in Process Account. Worked material issued and 
charged to one of the indirect expense accounts B or DM 
is credited to one of the subdivisions of the worked material 
in stores accounts, depending on the kind of material issued. 



We may draw from Worked Material in Stores a product 
belonging to one class which is necessary to complete a prod- 
uct of another class. Thus if a bolt classified under is M 
needed for G the entry would be Worked Material in Process, 
G, to Worked Material in Stores, M. 

Entry for worked materials drawn from stores: 

Dr. Worked Materials in Process Cr. Worked Materials in Store 



B 


20 


G 


1,100 


DM 


190 


L 


550 


G 


1,010 


M 


12.070 


L 


500 


P 


1.200 


M 


13,000 


R 


400 


P 


200 


T 


2,000 


R 


400 






T 


2.000 








17,320 


17.320 



Worked material drawn from stores for the purpose of 
returning it to the shop does not constitute an expense for 
the current month if it is chargeable to a direct product. 
In case worked material is drawn from stores and charged 
to an indirect or overhead expense account, then it must 
be charged in with the other classes of indirect expense 
when this expense is distributed to the direct product. 

The indirect expense accounts B and DM are charged to 
the several classes of direct product. Worked Material 
in Process, and to Construction, by means of the Expense 
Distribution sheet heretofore described. Form Plo. If the 
distribution is correct the B and DM accounts will balance. 

A list of Worked Materials Finished during the month 
is made out, giving the cost of each lot and the unit cost 
(taken from detail cost sheets) and sent to the Balance of 
Worked Materials clerk. The total of each class of product 
is sent to the bookkeeper who debits Worked Material 
in Stores and credits Worked Materials in Process. (Form 
PIO.) 

Products shipped to customers are charged to Accounts 
Receivable for each class of product sold, and the total of 
this account is credited to Mdse. Sales. For debits to this 
account and corresponding credits to Worked Material in 
Stores the bookkeeper gets from the cost-keeper the cost 
value of the products shipped, and the account is balanced 
into Profit and Loss. The Balance of Worked Materials in 
Stores (Form Pll) shows the cost value of worked materials 
on hand. 

When the general ledger is posted and proved by a trial 
balance, Monthly Statements are made out, including the 
following: 

Expense Analysis Sheet, a detailed analysis of each class 
of expense for the current month and for the preceding 
month. This analysis enables the administration to observe 
the class of expenditure which needs attention. (Form P12.) 

Finished Materials, showing the cost of each lot, unit 
cost, and best previous cost of each article finished during 
the month. Each class of product is kept separate and the 
total cost of each class given. 

Income Account, a sheet showing the amount and source 



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197 





[3k€€i ta X /4 tn. Buled 4* Itnet, in btooka <^9) 






EXHIBIT / 


I. 

id 




Shlf«tlt| Sheet ^'a- I 


Prom Clasf 


l«k# 




WORKED BfATERIALS Finished during the month ei 


ln<r 


I>»y of tQl 










■ "* 






Article or Coat Sales 


Symbol 


Quantity 


Total Coet of 

Finished during 
the Month 


COST PER UNIT | 


Remarks 


This 
Month 


Last 
Month 


thltTMT 

to DM* 


lutTw 


Best Previous Cost 




Amount JMonth 


Year 










I 
























~^~~~" 
























































: 






































irt-t_ 








- 




- 























FoBM PIO. Worked Materials Finished 





(aCse t» X #7 in, including a fn. nuirginfor binding) 

BALANCE OF WORKED MATERIALS 
DESCRIPTION 




I 


MOTE:. When the Material b in Process of Manufacture in the Shop, the Qnantity must be added to Columns 1 and 4. After it has been delivered to the 
Stores, add the Qnantity to Column 2 and subtract from Column I. When It Is sppordoned, add Quandty to Column 3 and Subtract from Column 4. In all 
cases bring down Balance on Hand, In each Column affected. 


l.-Shop. Worthed MateriEls. 

LE. Worked Materials In Process of 

Manufacture in the Shop 


2.- Stores. Worked Msterials. 
LE. Worked Materiab Temporarily In Stores awaiting further use 






Date 

Started 

In 

Shop 


Lot 
No. 


No. of 

Plecea 

or 

Quantity 


Cost 


Received 
W.M. 


Lot 
No. 


No. of 

Pieces 

or 

Quantity 


Cost 


Cost 
per 
Piece 


Issued for Order No. 








(48Un« 


,«pe 


inch) 






1 
































































































































i 


__^ 


1 




























{.Headinga 


CbnXfnu^d) 


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ASU 




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111 scturins Order fo 


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3.- Apportioned WorlLed MsteriaU. 


4.- Avsilable Worlwed Msterials. 

LE. Worked Materials In Stores 

and Shops not Apportioned 


Date 
Appor- 
tionedto 
an Order 


Lot 
No. 


No. of 

Plecea 

or 

Quantity 


Order No. for 




Dste 


No. of 
Pieces 

or 
Qnantity 


Remarks 


1 




















































































, 





Form Pll. Balance of Worked Mateiuals in Stores 





AF4» {Sheet fs X U m, Buled 
ASlinetlnblocktqfS) 


TM7nn A ¥T AH 


kT A V -vol 


ro ^^l? l?"V"Dl?'VTCl?C 


Sheets. Sheet No. 




FnrMnnthr«f 101 






Name or Symbol 
of Account 


THIS MONTH 


TOTAL AMOUNTS 


REMARKS 


Wages 


Salariea 


Total 


Storea 


Mlsc 


Worked 

Materials 


This 
Month 


Last 

Month 


Average 

This Month 
to Date 


Same Monti 
Last Year 


Average 
Last Year